Preparing For The TCJA Sunset With Whole Life Insurance

Preparing For The TCJA Sunset With Whole Life Insurance

By Tom Wall, Ph.D., MBA, MSFS, CLU, ChFC

One of the biggest opportunities you might be missing as an advisor right now is not discussing with your clients over 60 the chance to save on taxes under the quickly expiring Tax Cuts and Jobs Act (TCJA). While many of the tax cuts from this act weren't groundbreaking for most taxpayers, affluent married couples were granted a substantial break, particularly in the 22% and 24% tax brackets. Currently, married individuals can have taxable income up to almost $400,000 and still remain in the 24% tax bracket. However, this will revert to 33% after 2025 for many in this tax bracket. The window is closing to recognize income today and pay taxes at rates that are unlikely to be seen again for the foreseeable future. Recently, Kitces.com published an excellent article discussing these upcoming changes and the opportunities they present for clients. 

To fully understand this concept, all you need to do is research Roth conversions and assess whether it makes sense to pay taxes now or defer them into the future. Similarly, one could take distributions from a qualified plan, pay taxes, and then use the remaining funds to purchase life insurance, which, if structured properly, will never be income-taxed again. For those clients who have accumulated substantial assets and are no longer worried about having enough for themselves, but are very concerned about minimizing their tax liability over time and ensuring a legacy for their loved ones, the strategy of recognizing income today and purchasing whole life insurance can be a no-brainer. 

For example, a retired couple living on $200,000 of income may want to consider filling in the 24% tax bracket up to that almost $400,000 mark by taking distributions from qualified plans and using the after-tax dollars to purchase whole life insurance. They could overfund their policies in the first two years and then have the policy only require much lower ongoing premiums in 2026 and beyond. This opportunity has actually been available for seven years, but many advisors have failed to recognize it due to uncertainty about whether the tax code would revert to its pre-2018 brackets. The political winds seem to indicate that it's highly unlikely these current low tax rates will persist, creating a sense of urgency to act while the deal is still this good. 

It’s important to consult with a tax professional before making these recommendations, as there can be some ancillary outcomes, such as higher Medicare premiums. However, these increased costs are temporary and pale in comparison to the tax savings that can be gained. The clock is ticking on this opportunity, and you have a real chance to add significant value to your clients by implementing this strategy in your book of business. We will cover this in an upcoming session, or feel free to join me in my next office hours where we can discuss specific opportunities.