all right guys in this video we're going to talk about taxation of personal life insurance and annuities so i want to start off kind of just talking about pre-tax and post-tax if you get the basis of what i'm talking about it's going to make it make a lot more sense when we get into the material so pre-tax dollars means you work and you earn money let's say you earn a hundred dollars before uncle sam takes taxes out let's say you put twenty dollars in your retirement one hundred minus twenty is eighty dollars that means eighty dollars is taxable because you put this 20 in pre-tax uncle sam wants taxes when you retire and you go to take the money out all right so pre-tax examples are money that goes into your 401k it's coming directly out of your paycheck goes into your 401k it is taxable when you go to retire and take it out all right so y'all get pre-tax this means the money came out of your earnings before taxes let's talk about after tax money you're gonna see this pre-tax money on qualified claims so you often see it on qualified plans let's talk about after tax dollars so let's say you made a hundred dollars and uncle sam taxes you ten percent ten percent of a hundred is ten dollars you take home ninety dollars so taxes come out taxes leave your paycheck 90 is your income then you put money into your retirement i put the 20 into retirement and that leaves me with 70 all right this is after tax because you earned the money you paid taxes and now you're putting money away after taxes have been paid so uncle sam says oh we won't tax you on this because you've paid taxes on the money already all right and so an example of this you'll see is in a roth ira when you put the money into your roth after tax when you leave that roth account open five years or more when you go to take the money out you don't pay taxes all right so that's pre-tax after tax anybody with earned income can put money into a retirement account okay so let's say and i'm making this up but let's say the irs limit this year is 2500 and i'm making this up but let's say the irs limit this year is 2500 in your retirement account if you went and earned 250 cents you can put this whole 2500 into your retirement account so you can put money in up to the irs limit all right but you have to have earned income to do it so if the test asks you something like um billy was unemployed all of 2019 how much money could he put in his retirement account none he didn't have earned income okay all right so let's talk about qualified plans qualified just means irs approved the irs is going to give you favorable tax treatment because you followed certain guidelines and i'm saying you as incorporation corporation who started the qualified plan follow certain guidelines and irs says we like those and we'll check a box saying the folks who participate can have favorable tax treatment and you as a corporation can have favorable tax treatment so let's talk about favorable tax treatment on the corporation side when they put money into your retirement plan they can take a tax deduction all right favorable tax treatment when you put money into your retirement plan you can take a tax deduction remember i showed you you're not paying taxes on that money it's growing tax deferred right so those types of things those are benefits of qualified plans so here are some of the things that you have to the plan has to have in order to qualify uh as qualified so it has to be designed for the exclusive benefit of the employees so it can't be designed for any other reason other than an employee benefit and it can't cater toward any prohibited group so it can't cater to shareholders it can't be designed just for the benefit of high officers high-ranking officers in the in the organization it has to be formally written and communicated so people in the organization need to know they can participate it has to have a vesting requirement vesting requirement just means the amount of money that the company puts in your retirement account for you that there's a certain schedule to when you get access to so maybe you work there for two years and you're fully vested or maybe you know after the first five years you get 40 percent of your money vested so it has to have some formal vesting schedule it has to be irs approved and it has to be permanent so it can't just be something they did something the corporation did just to get the tax advantage that year it has to be permanent all right so contributions that you put into a qualified retirement plan are tax deductible that means you deduct that dollar amount from your taxable income and you pay taxes on what's left okay so let's talk about individual qualified plans two most common are the regular traditional ira and the roth ira traditional ira so this allows you to make a tax-deductible contribution until you reach age 72. so the secure act of 2019 changed it from the way that it used to be where you could only be 70 and a half now is 72. plan participants contribute up to a certain dollar amount or 100 of their income if it doesn't exceed that dollar amount so spouses can have iras too as long as they don't exceed the limit they can contribute all right so withdrawals on a traditional must begin by age 59 and a half i'm sorry they may begin they don't have to um by age 59 and a half but you must start taking distributions at 70 and a half all right i'm sorry y'all i'm so used to saying seven and a half is 72 now because of the secure act of 2019. um and so that's your traditional now let's talk about roth well before we talk about rocks let's talk about seps so simplified employee pension those are available to your self-employed people they're available to folks who have like small small businesses that maybe have you know under 100 employees you got like uh three to five employees that kind of thing then you can get what's called a step usually you're gonna see this with with the independent person so if i work for myself maybe i'm a plumber or a contractor i have a sip the thing to remember about a step is you can put up to 25 of your earned income into that account simple that's another type of plan so that's for businesses that have 100 employees or fewer simple so that's what you want to remember about that one simple 100 employees or fewer and the company can put up to 3 of the employee's annual salary taxation is deferred on the contributions that the person puts in and the contributions that their job puts in so taxation is deferred on that until withdrawal with 401k plans so profit sharing and 401k plans those are in the same family so 401k this allows an employee to take a reduction in their current salary so let's say my salary is 70 000 and i want to put 10 percent of my salary a year up then 7 000 every year is going to go up so i'm taking a reduction in what i would currently take home that is coming out pre-tax so when i go to take my 401k out when i retire i'm gonna pay taxes on that at my current income tax level so when i'm 65 i'm paying taxes at that tax bracket see so 401ks can be organized in different ways so a pure salary reduction plan that's like i just talked about you take some of your salary out it could also be a bonus where your employer puts bonus money away for you or a thrift plan that's where your employer has like a defined benefit that they know that they're going to put up for every person so they promise based on their profit how much they're going for 403 b that's another style these are for non-profits so what i want you to remember about 403 b 501 c if the test talks about 501 c 3 organizations or non-profit organizations those are the folks that are that can qualify for 403 b so that is a tax sheltered annuity you're going to see this with school teachers that's a lot of times where you'll see 403 b plans school teachers churches places like that so the maximum dollar amount changes every year that you can put up in a 403 b so it adjusts with inflation usually public school systems and stuff that's where you'll see that so let's talk about the taxation of a qualified plan the employer contributions are tax deductible to the employer so that means when they put money in your account they take a tax deduction when you put money in your account you reduce your taxes that year too but then you pay taxes later on when you go to take the money out lump sum distributions receive favorable tax treatment and if you needed access to the money before 59 and a half then you will pay a penalty unless you meet certain criteria so um death disability things like that distributions from the ira can be made prior to 59 and a half so that's one thing to remember but don't forget that 10 tax penalty now the penalty is waived remember i just said in most cases you're gonna pay the penalty but let's say you are totally disabled the penalty's gone if you're using the money for education the penalty is gone if you're using the money to put down payment on a house as a first-time homebuyer the penalty is waived so post-secondary education the penalty is waived so that's oftentimes uh catastrophic medical expenses the penalty is weighed so that's why i still encourage my clients to utilize their 401k or their ira even though that's a qualified plan a lot of people say well i don't want to pay the penalty if i ever need the money if you need this money it's because of something serious and they're going to waive the penalty for that i'll you're not touching it for nothing else if you're my client i'm a fuss okay so uh also if a judge orders during um divorce a judge can order the the proceeds or the money that's in that retirement account be split so that's something else that can happen now let's say somebody passes away and they haven't taken the money out of their 401k yet or out of their retirement plan yet by the fifth anniversary of their debt on december 31st so december 31st on the fifth anniversary of their debt that is when the money has to be out of the account so the beneficiary needs to take it out by then let's talk about roth iras so with roth iras contributions are not tax deductible so you're putting after tax money in you're not taking your tax deduction that year the money is still going to grow tax deferred that means you're not paying on the money at that time and then when you go to pull it out if you've left that account open for five years or more you're not paying taxes all right so legally you don't have to excess contributions that you put in are taxed at six percent same thing with your traditional so if you put extra money in your ira beyond the limit the irs says we're going to tax you additional six percent on that money because you're only supposed to save up to that limit all right so rollovers and transfers let's say oh one thing to remember about the roth ira is that the distributions do not have to begin at 72. so you don't have to take those required minimum distributions on a roth you can wait until later in life to take those sorry about that rollovers all right so let's say you leave your job you can take the money that's yours you know if your company says you're vested by five years and you've been working there 10 years you can take that money too you can take your money to your new retirement plan so you leave a job you can roll that money out let's talk about how rollovers work so rollover is a tax-free distribution from one retirement plan to another if the money rolls directly there then it is a direct rollover but if the money is given to you then there may be a twenty percent uh withholding from it okay so twenty percent of the distribution must be withheld so i have a friend of mines they like for us at the sheriff's office they tax when you take it out if you don't do the whole 30 years or you don't meet the age or whatever the requirements are but then you get taxed again when you file your taxes because then it's text has income yeah so you got the penalty that's the penalty part that you pay it down and you have to claim it as income yep so um transfer or direct transfer this is a tax-free transfer from one retirement account directly into another so this could be going from one traditional ira to another traditional ira uh where you're moving the money directly from one trustee to the other so if i have it at fidelity and i'm moving it to primerica right so that electronic transfer directly over now let's talk about personal life insurance and how it relates to taxes remember we talked about pre-tax and after tax let's say i get my paycheck and my paycheck is two thousand i get a paycheck for two thousand dollars i have already paid taxes by the time it comes to me as a paycheck when i sent off the sixty dollars for my life insurance premium i cannot write this off on my taxes so this is not tax deductible so your payment towards your personal life insurance is not tax deductible on personal life insurance when businesses pay for the life insurance for their key employee policies it is not tax deductible because that business is going to receive the proceeds from that policy tax-free they take it as a lump sum they're going to get the money tax free okay so when a business pays for what's it called um that executive bonus type of policy where they're paying the executive an additional salary they're paying them extra money and the employee takes that money and buys the life insurance that they want the company can take a tax deduction for that because they're just like they're paying you extra salary that is not their policy on you that policy is for your family they're just paying you additional salary so that one is tax deductible but the key person employee is employee plan is not tax deductible all right death benefits that are paid in installments where the installment has some principle and some interest that interest money is taxable so anything beyond the premium paid anything beyond that cost basis that money is taxable um dividends when you receive dividends remember mutual policies pay them pay dividends those are what we call participating policies so only mutual companies pay dividends the types of policies are called participating policies because everyone with a policy participates in the growth of the company if the board of directors declares a dividend that money is paid to you that's just a return of your unused premium the government is not taxing that that's your money being given back to you they don't tax that but if you leave the dividend money with the company to accumulate interest that interest is new money and so the irs wants taxes on the new money all right so growth is always taxed that's kind of an easy rule to remember policy loans remember i can take a loan from my policy and do what i want with i could take a loan from my policy look if i have a policy there's cash value i can take the loan from my policy and go on a vacation buy a car start a business i can take a loan from my policy and do what i want with the money i put it down as collateral in the bank so that i can leverage it for something else whatever i want to do it it's my money but policy loans are not income taxable when i die though that money is subtracted from my death benefit so accelerated benefits so let's say i become terminally ill and i need to take an accelerated benefit that means i the insured am terminally ill or need some type of expensive medical intervention and i'm going to take a part of my policy out early to take a part of that death benefit out while i'm still alive that money generally is received tax free generally is received tax free so up to a certain limit when i'm receiving those benefit payments let's say i have alzheimer's or some type of cancer where i'm gonna get an income um out of my policy then in some cases you're gonna see taxes on that all right and so um any amount received in excess of that dollar amount is income taxable so just remember that generally receive tax free if it's like i'm gonna take 40 percent of my policy out and go have a kidney transplant generally free of taxes if i'm receiving payments terminally ill and i'm getting payments over time then you may see income taxes surrender value so remember if i have a whole life or universal life it has built up some cash value if i go to surrender my policy that means i'm giving up my contract with the company and i'm just going to take my cash value generally that money is not taxable because it's a return of my money but anything extra beyond that so if that money has earned interest anything beyond the cost basis is taxable all right so let's say that the premium that i paid was seventy thousand dollars and my policy space amount is three hundred thousand total cash value that i have available is a hundred thousand and i wanna take a loan out all i paid is seventy thousand the cash value i have available is a hundred thousand that means the other thirty thousand came from somewhere it came from that accumulation okay so i'm going to pay income taxes on the last thirty 000 that i borrow does that make sense all right if the beneficiary receives the death benefit that's called a settlement right so we have different options on how we receive the settlement that's the big check in life insurance i have different options on how i receive that money if i receive it as a lump sum it's not taxable but if i receive it as like income that's paid over time it has some interest in it that money is taxable there's another time where you'll see the death benefit be taxable and that's if it is paid to the estate so let's say i don't name a beneficiary and my life insurance death benefit is paid to my estate it is federally taxable right so it's paid to my taxable estate and then also if there are some incidences of ownership so let's say i have sold my policy before i died um i gave my policy away to somebody within a few years before i died that is called incidences of ownership and then it is taxable so it's within three years if i've transferred that ownership over all right now let's talk about if i'm trying to pimp my life insurance right so you'll see this sometimes on youtube they're these youtube gurus that are telling people to over fund their life insurance and create their own at-home bank i am not a big fan of that idea right here's why we're going to talk about what the irs does with that so if the irs notices that you are over funding your policy that means you're stuffing way more money into that policy than it takes to fund your death benefit the irs has instituted what is called the seven pay test that means if you put more money in the first seven years of that policy than it would have taken to fund it then now it is subject to taxes it goes from being life insurance and having all the taxation benefits of life insurance to being a modified endowment contract that's what a mec is so if it fails the seven pay test that becomes a med with a modified endowment contract it has lost those tax benefits and so now if you want to take a distribution out or loan out you're going to pay taxes on that all right let's see any other thoughts on that if i want to take a distribution out before 59 and a half i have a penalty uh it's taxed on a last in first out basis so that means interest was the last to go into that account it is the first to be taxed on the payments all right but it still accumulates tax deferred right so any thoughts y'all good to go okay