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Life Insurance Awareness Month

September is Life Insurance Awareness Month

David McKnight, a retirement planning expert and best-selling author of The Power of Zero and other books, told May 4 NAIFA Town Hall attendees about the tax “freight train” heading our way and how the COVID-19 crisis affects the tax implications of retirement planning.

Taxes Are Going Up

The Tax Cuts and Jobs Act reduced individual income tax rates across the board, bu those reductions expire after 2025. The federal debt, exacerbated by the COVID-19 outbreak, is rapidly approaching $25 trillion. But citing research by economist Laurence Kotlikoff McKnight says the real debt, what would be needed to cover all of the government’s existing promises and obligations, is above $239 trillion.

“The federal government has promised way, way more than they can deliver,” McKnight says. This means that tax rates are almost certain to go up.

Current Tax Rates = The Sale of a Lifetime

Most retirement plan assets are in tax-deferred accounts. Generally, those tax deferrals have been advantageous, because workers have been contributing at times when tax rates were higher than today.

Now is the perfect time for financial professionals to help clients move into multiple streams of tax-free retirement income, using products such as Roth IRAs and 401(k)s and tax-advantaged life insurance products. For many clients, systematically repositioning their assets over the next six years will be a successful strategy. The goal, McKnight says, would be to get to a zero tax bracket in retirement.

That means taking the tax hit now and over the next several years during the “tax sale of a lifetime” rather than later, when rates will almost certainly be higher.

The Effects of COVID-19

Because of COVID-19, government spending is way up and FICA and other tax income are down making the federal debt situation even worse. It increases the likelihood that tax rates will go up Jan. 1, 2026.

Stock market declines resulting from the pandemic, however, reduce the cost of shifting assets to Roth products. The stock market is down now, McKnight says, but it will bounce back. “Why not let your assets recover in the tax-free bucket?”

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