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The Bond Myth

Bonds are generally regarded as tax-inefficient because the interest payments are always taxed as ordinary income – the highest rates in the code. Unless of course, you buy tax-free municipal bonds. But it turns out those aren’t so tax-free either.

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Revisiting the College 529 Plan

We are advocates of a plan that is also funded with after-tax dollars, and like the 529 plan, is accessible tax-free. It doesn’t generate a state tax credit, but it also eliminates any FAFSA penalty, and those tend to cancel each other out.

Where our plans really shine is that they are not exposed to market risk, and they can be used for any purpose – college, starting a business, travelling the world, or starting a killer long-term tax-free retirement account.

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The High Cost of ‘Free’ Money

We know – by the rule of 72 – that money growing at 7.2% will double in 10 years. So $100 pre-tax dollars grows to $200 in 10 years; and $75 after-tax dollars grows to $150 in 10 years. That’s their proof.

However, when that $200 is taxed at the same 25% rate, the qualified account ends up with – surprise – $150. There is no mathematical advantage to tax deferral.

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The Paid-Off Home Myth

If I have $1,000,000 in an IRA – the reality is – I really only ‘own’ the after-tax equivalent – say $700,000 if my tax rate is 30%. The rest belongs to Uncle Sam – I’m just ‘holding’ it for him, temporarily. So if my account grows by 10%, my portion of that growth is $70,000, and my deferred tax liability (debt) grows by $30,000.

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The Good, the Bad, and the Solution

If you didn’t know something as seemingly old and boring as life insurance could do all those things, perhaps it’s time to visit with your agent. Especially those of you in your 20s, 30s, and 40s should take a look into Indexed Universal Life – unless of course, you want to be sitting in an audience someday lamenting the fact that nothing good financially – happens to older people.

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Why pay full retail?

Let that sink in a minute – the 30 year cost could easily top a half a million dollars. Worse still – the meter is still running. Thirty years may represent the accumulation phase of our life, but the distribution phase (retirement) can last another 30 years. The math is exponential – meaning that figure can more than double over a lifetime.

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Tax (In)Equality?

In a recent review of all things financial (my favorite pastime), I stumbled across this tidbit. More than one-half of all Americans pay no taxes on a net basis. In fact, the bottom three quintiles (the bottom 60%) have a net tax liability that is NEGATIVE.

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