The LIRP: A Tax-Free Retirement Plan You’ve Never Heard Of

by | Sep 8, 2023 | Blog

Imagine a world where you don’t need to pay taxes on your retirement plan. Sound too good to be true? Well, a tax-free retirement fund is entirely possible thanks to the little-known Life Insurance Retirement Plan or LIRP. It is also called the “Rich Man’s Roth.” In contrast to standard retirement plans such as the Roth IRA, contributions to the LIRP are tax-free. In fact, your contributions won’t cause any Social Security benefits to be taxed, either.

So how does it work? Unlike traditional retirement plans, the LIRP allows you to purchase the minimum insurance required while contributing the maximum funds possible. To illustrate this concept, consider an ATM machine. When you withdraw money from an ATM, the fee remains the same regardless of the amount. For example, you’ll be charged a $2.50 fee whether you withdraw $20 or $200. As a result, you’ll want to withdraw more cash at a time to spend less on fees overall. A LIRP works the same way.

There are some great perks to choosing a LIRP:

  • Has liquidity: Liquidity is the #1 element you should look for in prudent financial strategies.
  • Has safety: Insurance companies have a long track record of safety. Safety has two components: 1) the safety of the institution where the money is entrusted and 2) the safety of the principal.
  • Competitive rate of return: When it comes to rate of return, the goal is to earn a competitive rate of return that historically has beaten inflation.
  • Favorable tax advantages: Tax-free strategies can help you avoid paying unnecessary taxes and safeguard you from outliving your money during retirement.
  • No contribution limits: While the Roth IRA caps contributions, a LIRP allows unlimited contributions, as long as they match a death benefit amount.
  • No income limits: The LIRP is a great option if you earn too much or too little for a Roth IRA. In fact, 85% of Fortune 500 CEOs use a LIRP for this reason.
  • No legislative risk: Though tax-free retirement accounts are constantly under legislative threat, the LIRP will most likely remain safe from any legislative change due to grandfather clauses in previous tax-law changes.
  • Multiple accumulation strategies: The LIRP has a diverse range of accumulation strategy options so that your retirement account works perfectly for you—via an investment portfolio, through the stock market, or linked to the index.

Why Isn’t Everybody Doing This?

  • Lack of awareness: We get in line; we mimic patterns; we follow the crowd, often without even realizing it. We don’t know what we don’t know.
  • Path of least resistance: Sometimes it’s not ignorance that keeps people from the benefits of getting a “Rich Man’s Roth” account; it’s much easier to follow the herd, to recommended financial strategies, or to sign up for whatever qualified plan is being offered at the office.
  • Too much work: For financial professionals, it requires self-education to stay up-to-date with the latest trends, regulations, and industry changes.
  • Selling clubs vs. teaching the swing: Many well-meaning financial professionals focus on selling the clubs (products) – they tell their clients to buy this mutual fund, open that IRA, or invest in gold or silver. Often, they don’t teach their clients how to develop knowledge and skills.
  • Not as lucrative: Traditional financial professionals are taught to recommend putting all your money in traditional financial vehicles like mutual funds, money market accounts, stocks, and bonds. Because that’s where the big financial institutions make their money, off their management fees.
  • Only so much insurance: The rationale is the financial professionals want us to be “diversified.” Now, diversification itself is something all of us experts agree with. But the danger comes when you have a significant portion of your money in the traditional vehicles – it’s a risk in the market.
  • Isn’t insurance too expensive?: The idea that insurance is too costly to use as a capital accumulation tool is one of the biggest misperceptions. Many uninformed financial professionals repeat this myth without stopping to really understand.
  • Isn’t it only for the wealthy?: Because they are a valuable tool for the affluent, many financial professionals assume IULs aren’t viable for those of more modest means. But nothing could be farther from the truth.
  • Hardly anyone is doing this, right? More and more people are attracted to this vehicle’s liquidity, safety, rate of return and tax advantages.
  • If it’s so good, why don’t you call it an investment?: IULs are not an investment because it is an insurance policy at its core. It is called insurance, plain and simple.

Why Haven’t I Heard of a LIRP?

The LIRP has previously only been accessible to the wealthy population. Not anymore—companies have since recognized the benefits of offering the LIRP to the average investor as a tax-free alternative to the Roth IRA. If the benefits of a LIRP outweigh the costs for you, it’s seriously worth considering as a low-cost retirement income stream. TetonPines Financial can help you determine if a LIRP will work for you. Contact us today for more information.