March 17, 2025 – What if you could retire with tax-free income nearing 8%—and spare your heirs a big income tax hit? In today’s Lifetime Planning of the Financial Sense Newshour, Jim Puplava and Crystal Colbert reveal a smart strategy for high earners in their 40s and 50s. They explore the Life Insurance Retirement Plan (LIRP) and Roth IRA conversions—think overfunded insurance for tax-free cash and a Roth twist to dodge multiple taxes, beating out municipal bonds. It’s perfect for those making over $500,000, with timing and location as key factors. Want the secrets to this tax-free dream? Tune in!
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Discussed in today's show:
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Target Audience: Aimed at high-income earners (over $500,000 annually) in their 40s and 50s, like doctors, attorneys, or executives, seeking a tax-free retirement.
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LIRP Basics: The Life Insurance Retirement Plan (LIRP) is a permanent life insurance policy overfunded to build cash value, offering tax-free income via policy loans.
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Roth Conversions: Converting traditional IRAs to Roth IRAs at lower tax brackets pairs with LIRP to create a triple tax-free income stream (no federal, state, or Medicare taxes).
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Income Potential: The strategy can generate up to 7-8% tax-free income annually, surpassing typical municipal bond yields (3.5-4%).
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Timing Matters: Requires 10 years of substantial premium payments and another decade of growth, making it ideal to start early (40s-50s) for retirement at 65.
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Heirs’ Benefit: Eliminates income taxes on inheritance by using Roth assets and LIRP death benefits, avoiding high mandatory IRA distributions under SECURE 2.0’s 10-year rule.
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State Tax Strategy: Living in low- or no-tax states (e.g., Nevada, Florida) enhances benefits by reducing Roth conversion taxes (e.g., 24% federal vs. 38% with California’s 14.4%).
Transcript
Jim Puplava:
Hi everyone. Welcome to another edition of Lifetime Planning. I'm Jim Puplava.
Crystal Colbert:
And I'm Crystal Colbert.
Jim Puplava:
And today we're going to do a special series on the program. We're going to show you how with proper planning you can not only preserve and build your wealth but enjoy a tax-free retirement. Now you may think, how's that possible? Well, we're going to use two vehicles and show how when working together, this can create a tax-free income stream for the rest of your retirement years. One is called a LIRP; it's called the Life Insurance Retirement Plan. And the other vehicle that we're going to use is a Roth. You're familiar with the Roth IRA. And we're going to show you how with proper planning when you get to retirement you will be in a zero bracket. And then what we're going to do is show you how you can convert your large IRA into a Roth IRA. And that is going to create a tax-free income stream along with the LIRP. So Crystal, why don't you give our listeners a little bit of background. What is a LIRP? Because it is a vehicle that they use for a lot of corporate CEOs and the Fortune 500 companies. It's a perk because these guys are making multiple million-dollar salaries, stock options, they're in a high tax bracket, and this is one way that the company can take care of their top execs and get them ready for retirement.
Crystal Colbert:
Yes. So as you mentioned, a LIRP, it stands for Life Insurance Retirement Plan. And it's basically a permanent life insurance policy like a universal life where you overfund the policy by paying more than what's required to maintain the death benefit, but not too much where it becomes a MEC policy. And so the excess cash flow allows the policy to accumulate cash value more quickly, which can be used for tax-free income in the future if you're pulling policy loans from the cash value.
Jim Puplava:
Now one of the things that we need to emphasize, this program only works if you're in your 40s or 50s. Because to fund this program you're going to either fund it right up front with a large payment or you're going to make annual premium payments just as you would on regular life insurance, except you're going to make them in larger amounts. Because the idea is this policy is designed to build up cash value that's going to produce tax-free income. There is insurance in there because that's what makes it tax-free as an insurance policy. But the emphasis is on cash value versus the death benefit. There is a death benefit, but the emphasis is on cash. And Crystal, let's talk about why this works for somebody in their 40s, in their 50s. It doesn't work as well, let's say, if somebody's in their 60s.
Crystal Colbert:
Yes. So it is ideal for people in their 40s to 50s because those are some of your highest earning potential years and where you're really starting to gain some traction. You're probably in some of the higher tax brackets like the 32 or 35%. So this is ideal for people who can't contribute directly to a Roth 401(k) just because it doesn't make sense. Even though you can contribute to a Roth 401(k), you don't want to pay the extra taxes. So the idea of using a LIRP, like you said, you can use a single payment option or you can do it over the course of, say, a 10-year period, but you contribute over those. Say you go with the 10-year period, 10-pay, you over-contribute each of those 10 years, you let the cash value grow for the next 10 years. So ideally this is a 20-year period of you contributing and then letting it grow. And then come the 20th year, once the cash value has really beefed up, that's when you can start taking those policy loans, withdrawals which are tax-free to you. So say somebody who's 45, you know, they contribute for the next 10 years till they're 55. They let it grow from 55 to 65. Once you reach age 65, that's when the cash value is going to really have accumulated and you're going to be able to get some nice withdrawals that are tax-free.
Jim Puplava:
Now what about somebody, let's say, who is age 55? How does that work for that person at that age?
Crystal Colbert:
Yes, so again, you can still make those—I mean, ideally it's 40s to 50s, you can still do it around 55, but you just want to make sure that once you have made those contributions, you give some time for that cash value to grow. So maybe you're not withdrawing till age 75.
Jim Puplava:
So let's take somebody that is, let's say, age 45. They're going to put—and once again, this is for people that are high-income earners, north of a half a million a year, plus a million. So whether you're a doctor, whether you're an attorney, an entrepreneur, a highly paid skilled professional, you're in a high-income bracket, maybe, let's say, even the husband and wife working together where they're making a high level of income. Let's give an example of how this would work. Let's assume, Crystal, age 45, I'm going to put $100,000 a year into a LIRP and we can also take one with $50,000 a year. You contribute for 10 years. Let's talk about how that's going to work and then the accumulation, and then let's talk about the second half of this tax-free return which is a Roth conversion. So let's give an example of how that would work.
Crystal Colbert:
Yes, so we actually did a case study for a 45-year-old male who does not smoke and gets preferred rates. So based off of the case study, we took a high-income earning couple in the 35 to 37% tax bracket and at age 45 they started implementing the LIRP strategy. So due to their income, not able to contribute directly to a Roth 401(k) since it doesn't make sense, they're maxing out their traditional 401(k) to get that upfront tax deduction. And then the rest of their investments, you know, they're contributing to their taxable investments and then they buy this LIRP policy. So based off of the LIRP illustration that we ran for a preferred male, 45-year-old, non-tobacco, from ages 45 to 54, they pay an annual premium of $60,455 a year, no payments from the ages of 55 to 64 to let that cash value grow in the policy. And then once they're 65, they decide to retire. Their investments include 2.25 million in tax-deferred retirement accounts such as their 401(k) and then 4 million in taxable investments and their LIRP policy. So based off of the LIRP illustration, at age 65 they can start to begin to withdraw a total of $130,556 a year for up to 25 years while they're collecting the tax-free income from the LIRP. Our idea is to really maximize Roth conversions up to—in the future, tax rates, as of what we know right now, are going to increase. So they're going to do Roth conversions up to that 28% tax bracket between the ages of 65 and 75 so they can live off of their taxable investments, maybe have some dividend income coming through. Or potentially, to really maximize Roth conversions, we did some tax-free municipal bonds in the portfolio. So off of a $4 million portfolio with a 4% yield, they could have $160,000 coming in in tax-efficient income plus the $130,556 tax-free income from the LIRP, total income coming in $290,556. So they can use that for living expenses, pay the Roth conversion taxes. And basically with this couple, we were able to fully convert the 2.25 million in tax-deferred retirement assets by the time they were 75. And this allows them to have only, you know, taxable investments, which are, you know, tax-preferred, as well as Roth investments by the time they're 75. So now all they're pulling in is tax-free LIRP income from the ages of 75 and up and then Roth income. So it's a great strategy to really get tax-free in retirement. That's the idea to use these two strategies.
Jim Puplava:
And let's point out it's triple tax-free. No federal taxes, no state taxes, and no Medicare taxes. As many of you are aware, when you have higher levels of income, your Medicare premiums can go up. There are six brackets for Medicare premiums based on your income. So this is triple tax-free. So as we look at this, at age 65, you'd be pulling out the equivalent of an 8.8% tax-free yield on that investment. And the beauty of this is—and this is why this works so well in retirement, Crystal—there's no way in the muni market, you know, we could get maybe 4% tax-free. You can't get 8.8% tax-free. So you would get an 8.8% tax-free yield from the LIRP. And here's the exciting thing. Once you put money into a Roth, whatever the yield is on the Roth, whether you own, let's say, a utility stock, or let's say a high preferred stock, or even a high bond, it comes out tax-free. For example, you can take a look at yields on high-income stocks like an AT&T or Verizon or an Altria that pays between upper 6% and 7 and 8%. You put that in a Roth and all of a sudden now anything coming out of that Roth is tax-free. And you can get yields that are twice as high or more than what you could get in a municipal bond. But when we try to boil this down, what we're trying to do—and this only works once again if you're in your 40s, early 50s—because like anything else, it's like you're contributing to a retirement plan. You're making an annual premium. And as you make those annual premiums, the cash value is going to grow in this policy. So you want to give it enough time to grow where you build up substantial cash so that when you get ready to retire, this is going to be your main source of income outside of anything that you've got invested personally, which could be dividend stocks or tax-free bonds. So in this case, it would produce $130,000 of triple tax-free income. And because it's triple tax-free, you then are in almost a zero percent tax bracket, which allows you to take money out of your IRA and convert it to a Roth IRA. Now you're going to pay some tax on that, depending on, you know, what state you live in, but the top bracket that we usually do conversions—and let's talk about that, Crystal—because right now you can earn $384,000 roughly if you are married and you will remain in a 24% tax bracket. After $384,000, the tax brackets go from 24% to 32%, which makes it impractical. So what we try to do in this case for this couple, we would be converting almost $370,000 a year into a Roth, of which they would end up paying 24% federal tax and then state tax. This really is a beautiful one. One of the strategies we've used with high-income earners is they retire. If you live in a state like California that has a 14.4% top income tax bracket, or you live in other states like New York, New Jersey that have high tax brackets, we've had our clients—they've moved to tax-free states. States like Nevada, Texas, Florida, Tennessee, or low-tax states like Arizona where the income tax is two and a half percent. So if you move to a tax-free state, then you're only paying 24% tax on the conversion. And here's the thing that I think is so powerful. It's not only tax-free to you and your spouse during your remaining retirement years, but it's going to be tax-free to the kids. Crystal, why don't you go over the way inherited IRAs work today with the tax laws because you could be creating a major tax problem for your children if you have a large IRA.
Crystal Colbert:
Exactly. So one of the benefits to this strategy and what we're trying to accomplish is really getting as much of the tax-deferred assets converted to Roth, because it's going to help you as a couple in the long run. You know, if you have all tax-free income, it's not going to affect your Social Security benefits, it's not going to affect your Medicare premiums. You avoid the widow's penalty completely if one of the spouses were to pass away. You know, you don't have to worry about increasing your income tax brackets as a single filer, but also when it comes to your heirs, by converting everything from your tax-deferred to your Roth, it makes your estate pretty much go tax-free to your heirs because you'll get a step-up in cost basis on the taxable assets. And Roth IRAs or Roth assets go tax-free to your heirs. And with the new SECURE 2.0, you know, if it goes to the spouse, they still have the option to stretch it out over their lifetime. But when it goes to your kids, there's a new 10-year rule that the assets have to be distributed within 10 years. So if you have a significant sum in tax-deferred assets, if they're borderline the 24% tax bracket right now, your assets could push them up to the 32% or higher and they have to distribute that in 10 years. But with a Roth IRA, if they get it that comes to them in Roth, it's not going to affect their taxes at all or their tax brackets. So it's a really great way to, you know, leave assets to your heirs if you're trying to be mindful of that as well.
Jim Puplava:
Yeah. In this case where there was about a two and a half million dollar IRA, if that couple, when the last spouse passed away, let's say it remained at two and a half million, that means their children would have to take out $250,000 a year. That alone is going to put them in the 32 or 35% tax bracket based on income. And so that's why if you are in a situation where you're going to have a large IRA—and it's not unusual—people that have worked 25, 30 years and have made good money and have maxed out their 401(k), they have—and plus with the markets going up—they have several million dollars in their IRA. And if you don't do this, Crystal, let's talk about the problems that if, let's say, we take the case of this couple, let's say they didn't do the LIRP and they just kept their IRA and retired. What would be the consequences when they turn age 73, when they have to start taking mandatory distributions? They're stuck in a permanent high tax bracket the rest of their life.
Crystal Colbert:
Exactly. And so by implementing the LIRP strategy, you're able to get tax-free income to basically allow for larger Roth conversions over the course of, say, 10 years. Right. So the idea is to really use that tax-free income and tax-efficient income from your taxable assets to maximize the Roth conversions. And based off of the case study that we did, we were able to save the couple over $2 million in federal taxes paid over their lifetime and get everything converted to tax-free assets for their heirs to inherit in the future. And we were able to convert the entire amount before they even needed to start taking RMDs. So it really is just a great strategy to save overall in federal taxes and have that tax-free income coming in.
Jim Puplava:
Yeah. The nice thing about this too is why this works for younger people, people in their 40s and 50s, because think of what you're doing now. You may be contributing to a 401(k), some kind of pension plan. So obviously you're going to be accumulating. When you're at age 45 and you're putting money into a LIRP, you've got to allow for years of contributions to build up the cash value and then you've got to allow that cash value to grow over a period of time, just as you are with your 401(k). But the beauty of this is you're going to have a tax-free—not only retirement, but it's also going to be tax-free for the next generation. So it's almost like generation-skipping that we do with the largest estates where the individual wants to pass the assets on, maybe have their kids have the benefits, but ultimately they want to pass it on to their grandchildren. And generation-skipping, you're sort of doing the same thing from tax planning. Not only are you going to enjoy a tax-free retirement, but your kids are going to enjoy a tax-free inheritance. Tax-free from estate taxes, tax-free from income taxes. And that's why these vehicles are out there; they use them all the time. Most of your Fortune 500 CEOs, this is a perk because you have to be real careful with pension plans in a company. You can't discriminate, you can't give special benefits to the top and not the rest of the workers in the company. So 401(k)s, you have top-heavy rules, things of that nature. One of the ways that corporations reward their top executives is they create perks like this—deferred compensation plans where, let's say, the bonus or extra income is deferred until they retire—and a LIRP. So money is put into a LIRP. So when that executive retires, they're going to have a tax-free income stream. So once again, the reason that we emphasize this works in the 40s, early 50s, this is an accumulation plan. You're going to be putting money aside every single year for about 10 years and then after 10 years you're going to allow that policy to keep accumulating. So in this case, Crystal, what was the total paid in and then—I think what, $65,000 times 10 years, that's about 650—at retirement it was about one and a half million, is that correct?
Crystal Colbert:
Yeah. So total paid into the policy was $604,560 and then total withdrawal could potentially be over 3 million. So $3.263 million if you were to withdraw over the 25 years.
Jim Puplava:
And what happens at, let's say, age 90?
Crystal Colbert:
Yes. So basically the policies that we put in place have an overloan protection to make sure that the policies don't lapse. So it would be at age 90, it would just stop because you wouldn't want that policy to lapse. So you wouldn't pull any additional funds from the policy. You would still keep it in place. It would allow the cash value to then accumulate more over time. And it does leave a tax-free benefit or life insurance policy to your heirs at that time if you were to pass later.
Jim Puplava:
So where this works—I want to emphasize this—this works for somebody in their 40s, in their 50s, because you're going to be contributing to this policy every year for about 10 years unless you do it up front. And secondly, you're going to, once you get done contributing to the policy, you're going to allow it to accumulate and grow because the higher that cash value gets, the higher the distribution you're going to get. In this case, it would be a yield of over 8%. And so when you look at these two strategies combined together, it's the only way that I know of in today's market where I can get anywhere from 7 to 8% tax-free income. You just can't get that today with interest rates being what they are, and especially now that the Fed's going to be cutting interest rates. We already have the 30-year bond down at 4%. And so even in the muni market, it's the best you can get. Munis today is probably 3 and a half to 4%. Whereas with the LIRP and the Roth conversion, you're getting 7 and 8%. So as we sum this up, Crystal, let's talk about the key things that are needed here. Number one, you have to be a high-income earner because you're going to be essentially setting up a second pension plan for yourself. And that's what they call a LIRP. You have to have enough income that you can make these contributions and you don't need it. So it's another way of saving for retirement. Number two, you're going to have to allow this to accumulate. You're going to make contributions for 10 years and you're probably going to allow it to accumulate for 10 years. And so by the time you get to retirement at age 65, you now pull this income out, it's tax-free, which means you're in a zero percent tax bracket. And then what you do is you convert your regular IRA to a Roth IRA, because you can do that in a low bracket. And the most that you're going to pay is 24% federal tax and any state tax. If you're in a high-tax state like California and you have two and a half, three million, you're almost better off actually going to Nevada, Arizona, because these high-tax states are added on top of the federal tax bracket. So in California, you could be in a 24% federal tax bracket. California's tax rates go all the way up to 14.4%. So if you add 14.4 onto 24, you're at 38, 39. It doesn't make sense. So the state that you live in really makes a difference.
Crystal Colbert:
Yes. And then the one thing—or a couple things—that I want to add to this is let's also remember that this is a life insurance policy. So, you know, you're never as young and healthy as you are today. So the sooner that you implement it, the better. But also just to add for some of the benefits of a life insurance policy, the cash value grows tax-deferred. So it's not like a taxable account where you're paying taxes as you go. There's also, like we said, tax-free distributions when the time comes in retirement. And if something were to happen to you, this does—it is a permanent life insurance policy. So it does have those death benefits that will go to your heirs if something were to happen. So it's just a great piece to add to your financial plan, whether it's for retirement, estate planning, or just protecting your loved ones.
Jim Puplava:
So in conclusion, if you are in one of those higher income-earning brackets, you're a successful professional, you have a successful business, or you have high levels of taxable income—income that you can afford to set money aside each year and save for your retirement—this is one of the best ways I know to enjoy a wealthy and tax-free retirement because you're using two strategies here. Perfectly legal. Roth IRAs have been around for decades now. And it's a very essential tool in retirement, especially for people that are in high-income tax brackets and will be. So in retirement, you know, you take somebody that has a $2.5 million IRA or $3 million IRA as a result of rolling over a 401(k), you're going to be in a high tax bracket at age 73. You have to start taking out about 4, 4.5% of that amount each year. And that goes up every single year. And what really hurts a lot of people, Crystal, is you'll have—let's take somebody that had a two and a half or $3 million IRA—they're taking out their minimum distributions. As a married couple, they're not quite in the higher tax brackets. Maybe they're in a 32% tax bracket. But here's the problem that happens with a married couple. Eventually one spouse passes away. Let's say it's the husband. Now the wife inherits the IRA, there is no tax. But now she has to take out distributions if she's 73 and older, but she's in a single taxpayer's bracket, which is much higher. So instead of $370,000 that you can take out and remain in a 24% bracket, you almost drop that in half. And then also that surviving spouse loses either their Social Security, assuming the husband's is higher. So the surviving wife takes the husband's Social Security, but she forfeits hers. We call that the widow's penalty. So this is why this is not only going to work well for both of you when you are retired, but it'll also work as well for a surviving spouse. So that surviving spouse is kept in a lower tax bracket as well as the children who will inherit this.
Crystal Colbert:
So if you would like to contact myself or Jim Puplava about potentially running some illustrations of how a LIRP could work for you and your financial plan, you can always reach out to me at the office here at 858-487-3939 or you can email me at Crystal[dot]Colbert[at]financialsense[dot]com. Or Jim, if they wanted to reach out to you, how could they reach out to you?
Jim Puplava:
You can reach me at Jim Puplava at Financial Sense. In the meantime, on behalf of Crystal and myself, we'd like to thank you for joining us here on Lifetime Planning. Until we talk again, we hope you have a pleasant week.
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