Using a tax-deferred account is a very common way many people choose to fund their Infinite Banking Plan. You will pay taxes on money that you withdraw from a tax-deferred plan. However, it is possible to reduce your overall tax liability and avoid paying any early withdrawal penalty. If you are 59 ½ or older, you can withdraw funds from your tax-deferred plan, pay ordinary income tax, and use the money to fund your program. If you believe your tax rate will go up, doesn’t it make sense to pay known taxes now? Also, the money you take from your Infinite banking Plan does NOT get counted as income by the IRS, so you can reduce the amount of taxes you pay on Social Security as well, win-win!!
Another great benefit of storing your money in an IBC plan – these plans do not have a Required Minimum distribution like profit-sharing plans (i.e., 401(k), 403(b), and 457(b), as well as traditional IRA, SEPs, and simple IRAs.) You decide when you want to take money out of your IBC Policy and how much; the government does not dictate the rules like in traditional retirement plans.
In addition, money you take from your IBC plan will not cause you to pay higher Medicare premiums. Medicare premiums are based on your Modified Adjusted Gross Income or MAGI. That is your total adjusted gross income plus tax-exempt interest.
According to AAPR, “If you are what Social Security considers a “higher-income beneficiary,” you can pay as much as 350% more for Medicare Part B, the health-insurance portion of Medicare!”
If you are younger than age 59 ½ and choose to withdraw money, you must pay income taxes plus a 10% penalty. However, there are a couple of different ways to avoid the 10% penalty, which we outline below. While you cannot get around paying taxes on your withdrawal, if tax rates go up, you could still come out ahead by paying the taxes now and moving your money into an Infinite Banking Plan. With your IBC plan – you can access your principal and growth with no taxes due!
One option you can take advantage of to avoid paying the 10% penalty is IRS tax code 72(t). Investopedia states, “To take advantage of this rule, the owner of the retirement account must take at least five substantially equal periodic payments. These payments must occur over the span of five years or until the owner reaches 59½, whichever period is longer.
The CARES Act that was passed earlier this year allows qualified individuals impacted by the coronavirus pandemic to pay back funds withdrawn from a qualified retirement plan over a three-year period without the amount recognized as income for tax purposes. The new law also temporarily waives the 10 percent early withdrawal penalty for Coronavirus-Related Distributions (CRDs) made between January 1 and December 31, 2020. In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that generally applies to certain retirement plan distributions.
It is important to note that not all plans allow loans, and distribution rules are at the employers’ discretion. So before making a final decision, be sure to check with your plan sponsor to see what your plan allows.
Moving money from a retirement plan is only one of many ways to free up cash to fund your IBC policy.
Whatever source you use, when you move money into an IBC plan, your money is safe from market risk, and you receive contractually guaranteed growth (24 hours a day, 7 days a week, 365 days a year!) and have access to your money to use throughout your lifetime.
I specialize in helping people find money to begin their first policy or start additional policies. Give me a call today at 574-234-1980 or email me at tom@neeserinsurance.com to find out how you can enjoy the peace of mind and financial security that a properly designed Infinite Banking Plan delivers!
