The best way to get tax-free income. In this episode, we are going to address the
question "Can you 1035 exchange from annuity to life insurance?" Get ready to
learn the do's and the don'ts what you can and can't do because you must do
1035 exchanges to like instruments. So what is they like instrument and you
want to make sure you improve the tax scenario, not make it worse.
So, my name is Doug Andrew. I've been a financial strategist for north of 46
years. And helping many many people optimize their assets, minimize taxes and
empower their authentic wealth. But especially from a financial standpoint,
to help them not outlive their money in retirement. One of my favorite vehicles
for providing the most predictable tax free cash flow or income at between 7 to
10 percent payouts. What does that mean? That every million dollars that you
accumulate can generate 70, 80, 90, usually up to 100 thousand
dollars a year of tax-free income for as long as you live. If you retired age
65, it would keep going if you live to be 120. It's
what I affectionately call the Laser Fund which is an indexed universal life
insurance contract that is maximum funded under IRS guidelines. So, many
times people will come to my educational event so they'll say, "Is this an annuity?"
No. An annuity simply put is a savings account with an insurance company. Many
different pension plans use annuities with insurance companies because the
multi trillion-dollar legal reserve insurance industry is not only the
backbone of America but the backbone of the world. It's off times where
governments go to for help. One of the insurance companies where I put a lot of
my money manages 3 trillion dollars that's as much as the IRS collects and
income taxes in an entire year. One insurance company, okay? So they've come
through the Great Depression with flying colors. There's not one single legal
reserve insurance company that went under in the Great Depression. In 2008,
when 400 banks went under and 900 more Rhonda brink the watchlist. During that
time, there was not one single legal reserve insurance company that went
under. If during a critical time period, they go temporarily insolvent because we
run on the bank they still honor all of their claims because the insurance
industry cross ensures each other. So, many people choose to put
money into an insurance company because of the safety, okay? It's the last
industry that would go if the entire American economy went to heck in a hand
basket. You would have so much warning, the banks would be failing, real estate
would drop 80% like the Great Depression. And you would have plenty of time to get
your money out. But think about it if it's that bad and you got your money,
where would you put it? See the American dollar would be worthless so it wouldn't
matter if you had your money if it got that bad. So, I put my money in the last
thing that would go before I would be forced to just live it live on that
carrots I grew in my backyard. Now, with an insurance company, there are 2
general products offered by most insurance companies that help people
accumulate their money for retirement and so forth. One is an annuity. Annuities
accumulate your money tax deferred, not tax-free. It's sort of like an IRA or
401K. You don't even have to have an annuity that's an IRA or 401k. You could
fund it with after-tax dollars but it's only tax deferred. If you put $500,000
into an annuity... And let's say it's earning 10% which most are not earning.
But let's say you had one that did. 10% on 500,000 would be $50,000 a year of
income. That would be 100% taxable income because the last money you're earning,
the interest is the first money coming out. That's what LIFO means. :ast
in first out. That's why I've never owned an annuity. I doubt I ever will.
Why would I own an annuity when I can earn a higher rate of return in a
maximum funded insurance contract? And people say, "What?" Well, an insurance policy,
you're paying for life insurance that's their more expensive. Not if you
structure it correctly, they actually outperform annuities. So, when people
learn this, they realize that the insurance policy, if its maximum-funded,
it accumulates your money not just tax deferred, it can be totally tax-free. So,
that when you put money in there and if it's earning 7 to 10 percent, a
year average. Like I've averaged your money will double every 7 to 10
years. Because 7.2%, your money doubles every 10 years. If you're earning 10
percent, it doubles every 7.2 years. And when I finally have a nest egg,
let's save a million bucks, the life insurance if it's indexed
universal life, I have averaged a little over 11% for the last 26-27 years
netting 10% after the cost of the insurance. So, it's actually pretty
inexpensive. I earn 11 and net 10. But that 10% is tax-free. Meaning, a
million-dollar nest egg can generate $100,000 a year of tax-free income where
an annuity may only give you maybe 5 or 6 percent payout. If they gave you a
10% payout, it's not tax free. So, the first question I get asked is, "Well
can you exchange an annuity for life insurance under Section 1035 of the
Internal Revenue Code?" The answer is next. So, the short answer
is no. Because they are not like instruments. One is an annuity which is
like a savings account with an insurance company where your money accumulates tax-deferred.
And when you take it out, it's now taxable LIFO. Life insurance
does not do that. Life insurance is totally tax-free as it grows. And when
you take it out, if you do it the smart way, is totally tax-free. So, you cannot do
a 1035 exchange from an annuity to life insurance nor would you want to. Now,
what's interesting, you can do the opposite. But I would never do that.
You could exchange a life insurance policy for an annuity and you can do
what is called a 1035 exchange. Now, section 1035 of the Internal Revenue
Code simply says that you can exchange one financial instrument from an
insurance company, okay? If it's life insurance for a like instrument another
life insurance policy. You could go from whole life to universal life. You could
go from variable whole life to variable Universal Life or indexed universal life
or whatever. But those are all life insurance policies. You cannot take money
out of an annuity and put it into life insurance because you're going from tax-
deferred into tax-free. And the IRS will not let you do that. But they'll let you
do the opposite. If you're dumb enough to take money that is tax-free out of an
insurance policy and do a 1035 into an annuity, you're going to trigger a tax
consequence instantly because now you're going over to an annuity and you have to
pay tax on on the gain that you had over and above your basis in the insurance
policy that was tax-free. And you just buggered that up. So, that would be a
stupid thing to do. But the IRS will let you do that one. But they will not let
you go from tax-deferred to tax-free in an insurance contract. So, what is the
best way to get the money out of an annuity and over to a better instrument
like a maximum funded tax-free insurance contract? So, you do not want to move
money directly from an annuity even if they let you and to go into the
insurance contract. Because you would ruin the tax-free nature of the
insurance because it did not come from a like investment. So, the better thing to
do and we've had many many people who would come to us with an annuity and
they were dissatisfied. Now, you always use caution. If you're going to do any
kind of an exchange, you want to analyze with an enforced illustration --what is
this annuity likely going to do in the future? And an insurance company will
give you an in force illustration showing based on current interest rates
and so forth what it will likely provide. But you really ought to ask yourself why
did you take out the annuity in the first place if it was to grow your money
safely at a nominal rate of return and then have taxable income has that
objective changed? Most of the time people say, "Well, yeah. When I learned that
a maximum funded insurance contract can outperform an annuity and it's tax-free,
I get a higher rate of return it's tax-free. And when I ultimately die,
if I have a million in there, blossoms to
2 million when I die. And annuity doesn't do that." Yep. And so, a properly
structured maximum-funded insurance policy can knock the socks off of an
annuity. But what you do is you simply look at the annuity and make sure that
you're not going to be clobbered with surrender charges if it's in the early
years of the annuity. Now, you don't want to wait until all surrender charges are
way. Because in an annuity, they usually go down, down, down to longer you've had
them the more years that you've owned it. But at a certain point in time, you will
make up for the surrender charge. At that point, you take the money out of the
annuity even if there's a small surrender charge. You take that money and
then you fund the insurance contract in accordance with Tefra Defra and Tamra
guidelines. Those are tax citations that make sure your money not only grows
tax-free but allows you to take it out tax-free down the road. I have other
episodes that talk about Tefra, Defra and Tamra if you type in those
questions, you'll see those a YouTube educational videos about those tax
citations. You take the money out of the annuity when it's the proper time. You
get it strategically put into the insurance contract and now, you've
improved your situation. If it's structured right, you will now accumulate
your money not just tax-deferred, it will be totally tax-free. But most importantly,
you'll have a higher rate of return if you use indexed universal life whereas
an indexed annuity generally does not have as high of rate of returns as
indexed universal life. The best indexed annuities usually illustrate between
maybe 6, 7, 8 percent at the best. My universal life insurance
contracts have performed at 10-11 and some years as high as 25% with
multipliers as high as 55%. You don't have indexed annuities
that do that. And so, you want to preserve the tax-free access, when you take money
out of an annuity, you want to improve your situation for a different goal. You
want the highest net spendable income and you want to grandfather yourself
under the Tamra tax citation to generate on a million bucks $100,000
a year of tax-free income without depleting principle which will
knock the socks off of a million dollars in a traditional annuity even an indexed
annuity, even with the same insurance company. And a lot of people even
insurance agents do not understand that. So, many times in my career, people have
said, "Wow! That sounds too good to be true. How can I learn about this?" This is what
motivated me to write my very first book which became a best-seller. And then
several other best-selling books, one became a New York Times, The Wall Street
Journal number 1 bestseller. But my 11th book is titled The Laser Fund. And
it's actually 2 books in one. This side is 200 pages, 14 chapters with all
kinds of charts and graphs of how the Laser Fund which is a max-funded indexed
universal life insurance contract. The laser fund means liquid asset safely
earning returns. That spells the acronym laser. And so, this is how to diversify
and create the foundation for a tax-free retirement where annuities don't do that.
If you learn by stories, you flip the book over and this site has 12 chapters
with 62 actual clients stories. I would love to gift you free a copy of this
book. I'll show you how you can get it if you go to laserfund.com. You simply pay
$5.95 shipping and handling. I'll pay for the book. You pay for the
shipping. I'll fire one out to you. You'll also have options if you like to listen
and learn or watch and learn with audio and video formats also.