Welcome back.
In this episode, I'm going to teach you how to utilize section 7702 of the internal revenue
code to be able to access your money tax free.
When you understand this in conjunction with how to accumulate your money tax free.
Let's see, the key point is to access it tax free so that you do not trigger all these
tax the most people have to pay on tax deferred accounts like IRAs, 401Ks.
This will give you 50 to 100 percent more in net spendable retirement income.
So, under the section 7702, this gives us parameters in which you can access money out
of maximum funded tax advantage insurance contract and not figure unnecessary tax.
Now, I'm going to share with you, there are 3 ways to access money of a maximum bondage
insurance contract which I call the Laser Fund in my various books and educational material
because if you do it correctly, and you structure it properly, it passes the liquidity safety
rate of return tax benefit test with flying colors.
It comes with highest score compared to any other investment vehicle that I'm aware of
in America.
Or the world for that matter.
Now, there are 3 ways to access money under 7702.
Simply put the sad way, the dumb way and the smart way.
Now, the code says this: If you used a life insurance policy and you're not paying the
minimum premium to maximize what you leave behind, it is strictly for death benefit,
you need to have it structured.
You have to qualify and justify the amount of life insurance that is coming along for
the ride.
Let's see, most people that would come to me, they're greatest concern was to have their
money somewhere that it would be liquid in the event that they needed it.
It would have safety principles so they don't lose.
They would earn predictable rates of return and they prefer tax-free.
Well, the only place that passes all those test with flying colors is the max funded
insurance contract when it's structured properly.
So, like what I've said, E.F Hutton had this...
They were the brainchild of "Wait a minute!
Let's take the least amount of insurance and put it in the most money and this thing turns
into a cash-cow."
So, what happens is people's money grows.
And as I've indicated in other episodes, if somebody would put in 500,000 like they did
back in 1980, they could've access their money tax-free right then.
I had several clients who did that.
They we're earning 11 and netting 10.
So, 10% on 500,000 is 50,000.
They pull out the 50,000 the smart way and it's tax-free.
It's not deemed earned income, passive income or portfolio income.
Those are the only 3 types of income since 1986 tax reform during grade and second term
that Americans pay income tax on.
Now, the IRS know that these people receive this money that they know it's a scared cow
under section 7702.
So, when you access that money --50,000 a year, there's no where on a tax return to
put it.
Because it's not earned income.
It's not passive income.
It's not portfolio income.
Now, earned income is what you go out and earn what salaries and wages.
If you have passive income, that might be rents or leases.
If you have portfolio income that's interests and dividends.
See most investments, you have to pay tax because it comes out as one of those 3 even
in an IRA or 401k.
If you have income in retirement and it's not one of those 3, there's nowhere out of
tax return to put it.
It's not a loophole.
I had clients that again, I've been pulling out 50,000 a year tax-free and not depleting
their 500,00-thousand dollar principle.
And they never been challenged because it's a no-brainer.
I mean, it's been that way for over 100 years.
Now, I mentioned there are 3 ways to access money.
Sad way, smart way, dumb way.
The sad way is by dying, okay?
It's one heck of a return but I don't recommend that one.
But if you happen to die, whatever is in there, if I have 500,000 in there and I die, it would
blossom to a million and two hundred fifty thousand.
If I have a million, it'll blossom 2 and a half million.
Nothing else does that.
And it transfers income tax-free.
Watch my episode on section 101(A) on why that happens.
But under 7702, there are 2 ways to access money.
That dumb way and the smart way.
So, I'm going to explain to you the difference between dumb and smart and why smart people
use the way so that they can have income forever.
They live to be 120 and it's not deemed earned, passive or portfolio income.
So, let's cover the dumb way first.
to simplify, let's say you started out with $500,000 and you needed income immediately.
You din't have time to let it double several times.
Under the internal revenue code section 7702, life insurance is one of the very few investment
vehicles that is taxed on a FIFO basis.
FIFO means First In, First out.
See most investments are tax LIFO.
Last in, first out.
So, for example, if you put $500,000 in annuity and you started to take income, let's keep
it simple.
Let's say, it was earning 10%.
Cost annuities don't pay that.
But 10% of 500,000 is 50,000.
If you started taking your 50,000 income, that is the last money your earning your interest
is your first money coming out.
You're paying taxes on all of your distribution except if you deplete principle.
If you're recovering basis, if you're getting back some of the original money you put in
by depleting principle, then if you already paid tax on it, you don't have to pay tax
on that.
If it's tax deferred IRA or 401K, it's always taxed LIFO.
So, what you're doing is an insurance contract, you are able to take it out FIFO.
So, if you put in 500,000 and if you were earning 10%, you pull out 50,000, The IRS
says, "Oh, first money in, that's just part of the 500,000 you put in there.
So, that's the first money coming out."
And that example, the first 10 years, it would be tax free.
Becasue it took 10 years in that example to recover your basis of the 500,000 you've put
in.
And if you've already paid tax on that which you do, you've put effort, tax, dollars into
the insurance contract, it's tax-free.
Now, if from the 11th year on in that example, you kept withdrawing money, you would trigger
tax because now, you've recovered your basis into your gang.
That is dumb.
You don't need to do that.
The IRS says, "Hold on!
Hold on!
You don't have to do that.
Just switch the no man clature."
You change what you're calling it instead of calling it a withdrawal which triggers
unnecessary tax after you recovered your basis, switch over and call it a loan.
"A loan?
Barrow my own money?"
Hold on just a minute here.
If you do that, you are borrowing the equivalent of the interest that you're earning because
most people are just living off of the interest or maybe not even all the interest.
So, if you're earning 10% and you're borrowing 50,000, what's collateralizing that 50,000
withdraw.
The half a million that sitting in there and now, it's earning.
Instead of withdrawing your interest, it grows to 550, six hundred, 650,000 and it's compounding.
Pretty soon, this balance is growing and it offsets the amount that you are withdrawing.
So, if 500,000 grows to 550 minus the 50,000 that you borrowed --that collateral, the net
is still 500.
But loan proceeds are not deemed earned, passive or portfolio income.
They are tax-free.
So, hang with me here.
I'm going to show you over 20 years or 30 years how this is magic because guess what?
The loan is not doing payable during your lifetime.
It's washed away when you die under the section of the code that I'm going to explain in another
episode on how t transfer tax-free.
But let's talk about how this loan is the smart way to access money under section 7702.
So, let's say that you put in 500,000 and it doubled to a million in 7 years.
So, you started when you are age 60.
And you've put in the 500,000 and at age 67, it's worth a million and you want to start
taking out the money the smart way under section 7702.
So, I recommend that you don't even withdraw up to your basis.
I like to use the smart way from day one.
And here's why: The insurance institution will allow you to be able to borrow your money.
the equivalent of your interest in one of 2 ways.
I want to access (let's say) 10% if I am netting 10.
Because that's easy ratio.
10% on a million would be 100,000.
So, I pull out 100,000 and if I borrow it, then the insurance company just like any bank....
If you had a million bucks sitting in a bank and you go, "If I go withdraw the money..."
But they say, "Well, you just leave it here in the bank and we'll paying you 1 or 2 percent.
But if you borrow it, we'll charge you 5.
The insurance company does the opposite because they are in the business of helping people
have predictable tax-favored retirement income.
So, instead of them only paying you 1 or 2 percent, the insurance company pays you 5,
6, 7, 8, 9, 10.
Especially if you link your returns to an index like I explain in other episodes.
So, I've been averaging 9,10, 11 percent.
Let's use 10 again.
If I go and take my money out the smart way, I can tell the insurance company, "Well, I'm
going to borrow the equivalent of the interest --the 100,000."
Why would I do that?
Because it will be tax-free it also grandfathers me to be able to put money back in the future.
If congress changes these tax laws, I can put money back.
I can pay off a tons of loan.
You see this loan balance is not doing payable during my lifetime.
It's washed away with tax-free death benefit at the end of the day.
So, I pull out 100,000.
That means my million grows by 10%.
So, it's a million one, minus the 100,000 loan balance is the net of the million that
I would've had pulled up the dumb way and trigger unnecessary tax.
But here's the deal: The IRS says in this section that the insurance company must charge
a nominal rate of interest.
Like 2 and a half or 3 percent.
So, if they charge 2 and a half percent interest on the 100,000-dollar loan, guess what?
They can credit me the same interest or higher.
If I'm earning 10%, they will keep paying me up to the index of 10% over year.
They're charging only 5 over here.
If I say, "You know what?
I feel like the economy's really going to struggle."
I can opt to say charge me 2 and a half percent and credit me 2 and a half.
That's called a zero cost.
Doesn't cost you anything to take it out the zero cost or zero washed loan.
But you know what I do?
I do it the smart way.
I say, "You can charge me 5%."
That's the maximum that many of my companies that I choose charge.
But I keep earning 10.
Wait a minute, how much for 10% than 5?
So, they're charging me 5%.
Let's say, out of million bucks, if I borrow a million they'll charge me 50,000.
But I am earning 10% then it's 100,000.
I don't care if it's 100,000 you're withdrawing or a million.
If they charge you 5 and you keep earning 10, you're earning 100% more than the cost
of the funds.
You're your own banker.
This is what allows people to use money for business purposes, for capital.
I actually have a client who buys a stripped malls.
He fixes them up and he flips them.
He doesn't like to stay being the landlord.
He will call and he will borrow, let's say, a million dollars out of his laser fund under
section 7702.
And he says, "Do, the index loan..."
Or it's called the participating loan --the smart way.
So, he is charged 5% on that million --50,000.
But he is being credited whatever the index is.
In 2017, you know he was borrowing it at 5 and he earned 25%.
In other words, on a million dollars that he withdrew by borrowing, he was charged 5
but he kept earning 25.
He earned quarter of a million minus the 50,000.
He made an extra $200,000 tax-free on his money while he was using his money to fix
up a stripped mall.
I mean how good is that?
If you're mind is getting blown right now, good!
Because I have other episodes that will show you how you can use this.
But this is how money works.
You're just your own banker.
Banks borrow our money at a lower rate and they earn a higher rate.
When you access your money, you can just withdraw it.
It's tax free up to your basis.
You can then borrow it and just...
It's a zero cost if you want.
But you know what I do?
I borrow at a lower rate and keep earning at keep earning at a higher rate.
And you can not believe it.
It allows you to access another 1 or 2 percent higher rate of return.
So, if you're only earning 7, you can actually withdraw at 10% and not depleting your principal
in many periods of time.
That's why I say to people, "If you have a million-dollar nest egg and you're only earning
7, how can you pull out 10% and not deplete principal?"
Because you're using section 7702 that pull out your money the smart way.
So, if this is intriguing you, make sure you watch the episode about 72(E), 101(A).
But especially this episode that sort of connects all the dots on how this is tax free in the
internal revenue code.