Hello again. We are going to address in this episode in depth what section 72(E)
of the Internal Revenue Code means and how it came about and why it's a sacred
cow. And how you can take advantage of it so you can have tax-free accumulation of
your hard-earned money. Section 72(E) was designed to be able to help or benefit
those people who took ownership to provide for their own families whether
they live or die. So, what does it mean? I'm going to dive into the portion that
really relates to tax-free accumulation of money whether you're earning money
with interest or dividends. And so, the place that we're looking at here is in
machs funded life insurance contracts which is what E.F Hutton who was a
brokerage firm, they're sort of credited with being the brainchild behind the
insurance policy that was used more for living benefits instead of just the
death benefit. So, under Section 72(E), it says that any money that is inside the
insurance contract... This is whole life or universal life. Permanent life insurance.
That when it grows with interest or dividends, you do not have to pay tax on
that because why would they penalize people who are trying to be responsible
and accountable take ownership for their future so that if I passed away and I
left behind a life insurance death benefit to my widow for my children, this
is so that they do not have to be dependent upon the government or go on
welfare. And so the government said, "You know what?" We need to incentivize people
to take ownership. So, that they don't come to us therefore let's not tax any
of the inside build up or growth on that cash value. Now, it was
E.F Hutton back in 1980 that said, "Wow! You know, we've been always looking at this
may be the wrong way. Section 72(E) says it will grow tax-free." Well, that was back
in an era where Hutton was trying to earn average rates of return maybe in
9, 10, 11, 12 percent rates of return. But the metaphor that I use is
like playing red light green light. And so, if you're going up and back up and
back in the market taking maybe 12, 15, 20 steps forward or 20% gain in
some years and then you have to take steps back when the market crashes,
Hutton said, "You know, some people just don't want to go through those gyrations
in the market. So, why don't we just have a more predictable rate of return and we
don't have to go out and risk their money so much. And we can earn a rate of
return back in 1980. Interest rates were high. And so, let's earn 11 instead of
trying to earn 15 because if you earned 15% in a tax-deferred IRA or 401k,
you're only netting maybe 10%." And so, you're taking 15 forward steps, 5
steps back in tax. Or if you earn 12%, you're taking 12 steps forward, 4
steps back in tax at the end of the day. And maybe another step back in fees.
People had to earn 12 to net 7. They had to earn 15 to net 9. E.F Hutton said, "Hey,
72(E) says it grows tax-free. Let's put it in a more conservative portfolio in
the multi trillion-dollar insurance industry where they don't put money out
in the market. Very little of their money is in stocks. Their money is in triple-A
and double-A bonds if they loan money out on a skyscraper or a shopping mall.
They loan only about 50 to 60 percent loan to value. They don't take
risks. But they're able to earn a rate of return back then of around 11 and 3/4 to
15 and a half percent is what I earn from 1980 to 1990. Let's just drop it
down to 11. So, because of 72(E), my money would earn
11%. One of those percentage points paid for the insurance that under Section 72(E)
said it had to be there or it wouldn't be tax-free. Again, why is it tax-free?
Because the life insurance will blossom when I die and transfer. And so they want
to make sure that I have the greatest chance of having life insurance in force
when I own when they die. Well, when I was 30 and my wife and I had
6 children, if I want a three million of life insurance and I just want to
protect myself if I was going to pass away, I'm trying to get the most
insurance for the least premium, the cheapest premium. Hutton changed all that.
Because of 72(E), they said, "Wait a minute? Why don't we flip it? Why don't we take
the least amount of insurance? The IRS will let us get away with. And put in the
most money the IRS will allow. And it will turn into a cash cow." And that's
because under 72(E), we're putting in way more than the actual cost of the
insurance because the money we put in there, when it grows at 11,
we're netting 10. Because the cost of the insurance is only draining out one
percentage point and it's tax-free. If it does not fall under the definition in
the Internal Revenue Code under these three sections, then it will not be tax
free. It moves over to another section where they tax you. Those are taxable
investments. And most investments are volatile. So, I don't want the volatility.
I don't want to pay the tax. And E.F Hutton said, "Hey, 72(E) is our hero. We are going to
accumulate our money tax-free." And I'm going to share in other episodes how you
can access and transfer the money tax-free. So, let me tell a story to
illustrate the power behind tax-free accumulation. In other episodes, I talk
about how a dollar doubling every period for 20 periods. Well,
had the potential to grow to a million bucks if it's tax-free. So, back in 1980
when I had about 3,000 clients in the market and I was trying to earn an
average return of 12%, (actually doing a pretty good job) I realized at the end of
the day, they're going through volatility. And if they earn 12, they're only netting
8% after-tax. And if they have to pay broker-dealer concessions or fees,
they're only netting 7. Well, my clients were never happier than when I got them
out of the market. I linked their returns to the market but they they got rid of
the market volatility and they were able to average 11, little over 11%. And
net 10. Now some years, they earned 15 and then at 14. I remember many couples that
had saved their entire lifetimes, okay? One in particular they had 500,000.
So, they put in $500,000 back in 1980. Now,
they're earning 11 and 3 quarters, 15. Let's say 11. So, 11%
on that $500,000 after the cost of the insurance which was one of those
percentage points, they were netting 10. What's 10%
of 500,000? 50,000. Because of section 72(E), that was growing
tax-free. Now, let's say they don't even need the income. Now, if you're earning
something like 10%, 10 divided into the rule of 72. And if you don't
know what that is, I have another episode on that. That means your money will
double every 7.2 years. So, a half a million grew to a million doubled in 7.2
years. In another 7.2 years, let's just round it to 15. The million doubled to 2
million. Guess what happened the next 7 and a
half years? It doubled to 4 million and the next 7 and a half years, it doubled
to 8 million. So, 500,000 to a million, 2 million, 4 million, 8 million.
This is the true story. This couple has 8 million dollars now in their nest
egg that grew totally tax-free because of section 72(E). Now, I want you
to watch a video about 77-02 because you'll realize that 8 million dollar
nest egg at 10% in a payout would allow you to experience
$800,000 a year of tax-free income into perpetuity versus
an IRA or 401k. You wouldn't even have that much money because you have to pay
tax on the money when you take it out. So. the power of 72(E) for many many people
is that they're able to accumulate their money tax-free. It's a sacred cow. But
then, they can use it and access the money tax-free. So, I want you to watch
this video to be able to understand that. And also be able to understand how you
can learn more about how you can apply this in your set of circumstances.