April 7, 2025 – Curious about a tax-free retirement? In our latest Lifetime Planning podcast of the Financial Sense Newshour, Jim Puplava and financial expert Crystal Colbert unveil the power of a Life Insurance Retirement Plan (LIRP)—a secret weapon used by top executives to secure high-level, tax-free income (think 10-12%!). Perfect for high earners aged 35-55, this strategy pairs beautifully with Roth conversions to slash your tax burden. From tech moguls to savvy couples, they dive into real-life examples, revealing how to grow wealth tax-deferred and enjoy a worry-free retirement. Want the full scoop on this game-changing plan? Tune in now!
To speak with any of our advisors or wealth managers, feel free to Contact Us online or give us a call at (888) 486-3939.
Stay ahead of the news! Subscribe to our premium weekday podcast
Transcript
Jim Puplava:
Welcome everybody to another edition of Lifetime Planning. And today we're going to talk about how you can, with proper planning, go through a tax-free retirement. Now a lot of the things that we're going to be talking about are going to be dependent on the income that you earn when you're working and then also what it's going to look like when you retire, especially when we start talking about Roth conversions. But what I want to begin with today, and joining me on the program is Crystal Colbert—she's one of our lead financial advisors—is I want to talk about something called a LIRP. It's called a Life Insurance Retirement Plan. And this is a way that you can get high-level tax-free income in the neighborhood of 10 to 12% tax-free. It works specifically the best for people that are in the, let's say, age 35 to maybe 55, where you have a 10-year accumulation. So Crystal, why don't we begin and talk about what is a LIRP for our listeners that may not be familiar with this.
Crystal Colbert:
Yes. So a LIRP is a Life Insurance Retirement Plan. That's what it stands for. And it's a permanent life insurance policy, like a universal index or attached to an index, where you overfund the policy by paying more in premiums to maintain the benefit. So that way the cash value in the account grows a lot faster and more quickly to use in the future for tax-free income.
Jim Puplava:
And for those listening, this is a benefit that a lot of corporations use for their top executives. That's where this originated. So if, you know, if you're Larry Lots-of-Bucks working for a Fortune 500 company, you're making a million, multimillion-dollar salary, you've got stock options, and you're in the highest tax bracket, this is a way that corporations take care of their executives so that when they do retire, they have a retirement plan that is going to get them tax-free income because these guys are already paying enough in taxes. So let's talk about specifically how this works because it's not just that you fund it for a 10-year period, but you also want the policy to accumulate and grow for 10 years. So if I'm 35, I contribute to the policy for, let's say, 10 years, and then at 45 when I stop payments, and then I let it accumulate for the next 10 or 15 years, so that, let's say, I get to age 60, 65, or whatever age you want to retire. Now I have a large policy that's going to generate tax-free income at a high enough level, and we're going to get into, in a minute, how we can use this in combination with a Roth conversion so you don't have any taxable income. And if you have a large 401(k), 403(b) plan, whatever it is that you have, you can convert that to Roth. So then the Roth is producing tax-free income along with a LIRP. And basically all your income is tax-free except for Social Security.
Crystal Colbert:
Yeah. And I think a lot of people forget about kind of the benefits of putting a life insurance policy in place and the benefits of a LIRP. So one reason is all the funds that are in the cash value, they grow tax-deferred. So you're never going to get a 1099 on the cash value of the life insurance policy. So you don't owe taxes. And then when you withdraw the funds and you take a policy loan, you don't owe taxes on those funds. It's tax-free to you. So that's why we're saying, you know, in retirement, using those to fund, you know, your basic living expenses and potentially doing Roth conversions and paying those taxes there. And then the last benefit is it is a permanent life insurance policy. So if, God forbid, something were to happen to you, it is paid out tax-free to your heirs.
Jim Puplava:
So how do you use a LIRP? Let's talk about somebody age 35, maybe they're working at a tech company, they're making three, $400,000 a year, they're getting maybe an equal amount in stock options. You know, we have one client that works at a tech company and between salary, between stock options, and between bonus, they're at a very high, high level of taxation. So let's talk about a practical use. Who does this fit? And then after talking about somebody working, let's talk about how would this work for somebody, let's say age 60, because this doesn't work after age 70.
Crystal Colbert:
So like we said, the ideal time to start a LIRP strategy is for those high-income earners, people over the 24% tax bracket, where it doesn't make as much sense to pay the taxes now and contribute to a Roth 401(k). So instead, the ideal situation is if you are a high-income earner actually contributing to a traditional 401(k) so you can get that upfront tax advantage or deduction, and you have more money in your pocket to then fund a LIRP policy. So you use those extra funds that you have to then pay into this life insurance product that will grow—you know, you overfund those premiums so that the cash value grows, but not overfunding it too much, so it exceeds the MEC value. So you basically fund it for—you could do a payment plan-type thing, like a 10-year pay. So each year you're paying into this policy, and it's growing tax-free, and then you kind of wait a 10-year period to let that continue to accumulate, and then start taking it out later in life. Or there's also an option where, if you are—generally we tend to do this if somebody is nearing the end of the ideal age bracket—maybe funding it with a lump sum. It goes into what we call a premium deposit account where it's still earning; currently it's at 4.5%. Basically, your cash is earning 4.5%. And then each year, maybe it's not 10 years, maybe it's a little bit shorter, like five to seven years, but it is funding that policy and then allowing still that same, hopefully 10 years, to grow so it can accumulate a little bit faster. So you do have those funds to withdraw during retirement.
Jim Puplava:
I want to bring this into focus for how this works in planning because we use this in combination with Roth conversion. So you're getting tax-free income from the LIRP, and then once you fund the Roth conversion, after five years, that is generating tax-free income. And this is really a wonderful plan for somebody that is in the maximum tax bracket; they're paying a lot of taxes. Wouldn't it be nice when you retire to have a high level of income that's tax-free? Why don't we sort of share a case study that we've been working on where we have a high-end individual, he's making a lot of money, we're using the LIRP, and when you think of a LIRP, it's called a Life Insurance Retirement Plan because this really takes 20 years. If you're 35, you're going to fund it for 10 years, and then you're going to allow it to accumulate. That's why they call it a retirement plan. You're allowing the policy to grow, to build up just like your 401(k), so that when you have to tap it for income, it's going to be a lot larger. Now let's bring this into, let's say, a planning scenario where we're using the LIRP and Social Security and then doing the Roth conversion. Let's go through that for our listeners.
Crystal Colbert:
Yes, so for somebody who's—let's just say a husband and wife—they are in their highest income-earning years, they're in the 32% tax bracket. So it doesn't make sense to actually contribute to the Roth 401(k). So instead, what they do is they make their employee contributions to the traditional 401(k) and max that out, and then take the extra funds that they have and start funding a LIRP policy. So basically, you know, from age 45 to 55, they're funding this, you know, life insurance policy to let that cash value grow over time. And then from 55, you know, they no longer have to fund that policy anymore. After that 10 years, they're just allowing it to grow. So come age 65, they officially retire, and they need to start withdrawing income because now they no longer have income coming in. So what they'll do is they'll start taking policy loans against the LIRP policy, so they'll get that tax-free income coming in to fund their living expenses, and then at that same time, doing Roth conversions. Because that LIRP income is income-tax-free, it builds a lot stronger or allows for a lot larger of a Roth conversion each year because they don't have to worry about any sort of tax implications from that tax-free income. So that tax-free income from the LIRP can fund their taxes for the Roth conversion, allow for much larger Roth conversions, and have additional funds to live on for those years. And ideally, they would convert their full 401(k) by age 75 when they're required to take RMDs. So then, if the tax-deferred accounts are completely converted to Roth, now the only income coming in is from their LIRP policy and any sort of distributions that they take from their Roth in the future. So all tax-free income, and in conjunction, like you said, Jim, with Social Security, any sort of income that comes in tax-free, like LIRP income and Roth distributions, it doesn't affect your Social Security benefits and how they're taxed. It won't affect your Medicare Part B premiums. So it really will just allow for so much more tax benefits by implementing this sort of strategy.
Jim Puplava:
And the current tax bill that's working its way through Congress has some provisions in it. Trump talked about not taxing overtime and tips, but also making Social Security tax-free the way it used to be prior to 1984. I don't know if you're out there—if you may not realize this—but prior to 1984, when you got your Social Security when you retired, it was tax-free income. You were getting your money back. So if that provision was going through, then your Social Security would not be taxable, your LIRP wouldn't be taxable, and your Roth wouldn't be taxable. And the other thing I want to point out from an investment point of view, we do a lot of work in the municipal bond market because of the nature of our clients. And, you know, maybe I get three and a half, 4% on a tax-free bond. We don't want to go out too long-term with this kind of environment. But the nice thing about a LIRP and a nice thing about a Roth conversion—so if I have a Roth IRA and I go out and buy a company like Altria, which pays an 8% dividend, it comes out 8% tax-free. That is twice what I could get in a municipal bond. Or they buy stock like AT&T, or they buy some of these pipeline companies that are paying 7 or 8%. So you're getting 7 to 8% tax-free from your Roth, and you're getting 10 to 12% tax-free from your LIRP. So you're getting a higher level of tax-free income. And so if you're thinking about your budget in retirement, if you're not paying taxes, think of how much more your money will last and how much more it will buy in terms of lifestyle if you don't have to pay Uncle Sam or the governor.
Crystal Colbert:
Yeah. And just think about how it also affects your capital gains taxes. Like if you're married, filing jointly, if you don't have that taxable income and under a certain threshold, you actually report 0% taxes on capital gains if you're under a certain income threshold. So it affects so many areas by having that tax-free income coming in every single year.
Jim Puplava:
And this has been used in the corporate world for multiple, multiple decades. And it's just now being known to, let's say, the private sector. Let's talk about somebody—it works well, as we mentioned, it's a retirement plan. You know, you're talking about 10 years of funding, 10 years of accumulation or more. So it works well for somebody 35, 45, and 55. How is it different for, like, we'll use this for somebody age 60, but we're going to fund it differently. Explain that.
Crystal Colbert:
Yeah, so generally if you're in the 60 and older range, what we tend to do is, like I was kind of stating before, it's that lump-sum premium—or, well, it's not a premium, but it's a lump sum that you put into the premium deposit account, which, you know, has an interest rate tied to it. So right now, it's at 4.5%, which is great compared to other high-yield savings accounts or what you can get in Treasuries; it would be locked in at that 4.5%. But it is a shorter window that the policy can be funded and accumulate over time. So it doesn't accumulate as fast or as large. But there is still that opportunity to still get a LIRP policy in place and generate some tax-free income to maybe pay those Roth conversion taxes. It just wouldn't be as large. So ideally, you want to start as soon as possible in your higher-income-earning ages, but we still can definitely make it work if you're 60 and older.
Jim Puplava:
And the other thing I would stress is this: if you're in a high tax bracket, so let's say you and your spouse, or just you by yourself, if you're in that high tax bracket—you're in the 35—well, actually 32 to 37—and you could add a little more to that if you hit the Obamacare thresholds at 200,000 single, 250 if you're married. But if you are tired of paying these kinds of taxes now during your working career, do you want to be in the same situation when you retire, paying high taxes on your RMDs, your distributions from your IRA when they become mandatory at age 75? So this is a nice way to do some planning so that, you know, 20 years from now or 30, whatever it is, whatever age you plan on retiring, you're going to have a tax-free retirement. So number one, you're going to have higher tax-free income, you're not going to be paying taxes. So it doesn't take as much money to fund that retirement. So here's the point we like to make: you want to reduce your taxes. It takes planning, you know, so work with your advisor or somebody like us that can help actually minimize your taxes during your working career and, more importantly, lead you into a tax-free environment when you retire. So if you have any questions, please feel free to give us a call. Send us a question. If you’d like some topics like this covered in Lifetime Planning, we'd be glad to do that. But in the meantime, on behalf of Crystal Colbert 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.
To learn more about Financial Sense® Wealth Management, give us a call at (888) 486-3939 or click here to contact us.
For a link to our full podcast archive, see Financial Sense Newshour (All) and don't forget to subscribe on Apple Podcasts, Spotify, or YouTube Podcasts!
The Financial Sense Newshour is for informational and educational purposes only and should not be considered as a solicitation or offer to purchase or sell any securities. The investments, investment strategies, and investment philosophies discussed or presented on the Newshour each involve their own unique risk factors, which are not discussed on the show. Financial Sense Newshour and its parent company shall not be liable for any financial losses that result from investing in any companies mentioned in Financial Sense or arising out of the use of any material on the Newshour. Be advised that you invest at your own risk.
