Congressional Spending and the Impact to Savers

Protecting your assets is even more important as Congress shifts its focus from incentivizing Americans to save for the future, to penalizing those who have successfully saved. Many savers want to understand all the risks they may face in retirement. Unfortunately, too many do not fully understand legislation risks and how they can impact their assets.

As elected officials pass new laws to raise billions of dollars in taxes from 401(k)s, IRAs, and Roth accounts, people are at risk of having fewer retirement assets and less retirement income than planned. If you want to address the potential risks to your retirement funds, you may need to mitigate tax and legislative risks. Many have leaned heavily on Roth accounts to protect their retirement assets from rising retirement taxes but, as in recent cases with the latest tax and spending bills, Roth accounts are also susceptible.

LIFE INSURANCE STRATEGY

Congressional members have proposed changing multiple sections of the tax code. One not mentioned is IRC Title 26, Sec. 7702—the section covering life insurance. The use of cash value life insurance, specifically Indexed Universal Life (IUL), is one strategy some savers have incorporated into their savings approaches as either a death benefit protection or a supplemental source of retirement income. Some have chosen this approach to help protect a portion of their funds since the legislative risk of IUL and other cash value life insurance policies has not been heightened by any of the tax and spending bills. Texas Trusted Advisors believes this new approach to taxing retirement accounts has strengthened the value IUL may

deliver. It is worth noting the cash value of a life insurance policy, like IUL, is not counted towards Congress’s arbitrary cap on assets under this bill, whether that cap ultimately lands at $10 million, $5 million, or any other amount.

CONTRACT BENEFIT

Additionally, Texas Trusted Advisors believes IUL is less susceptible to legislative risk than qualified and Roth accounts. That is because IUL policies, like all life insurance policies, are private contracts between an insurance company and a consumer. There is a significant difference between legislative changes to accounts versus contracts. No matter what laws were in place when you started saving in a qualified or Roth account, Congress is able to change the rules, and those changes can take place immediately. However, the courts have repeatedly upheld a different set of rules for contracts. Legislative changes to private contracts can only be implemented for contracts going forward. They cannot change contracts already in place. This means if Congress changes the rules for IUL, existing contracts would experience no change.

In this way, some savers may use IUL as a hedge against both rising taxes and legislative changes. For more information about this retirement strategy, contact Texas Trusted Advisors at 512-261-7660 for a free consultation. Click to learn more.

This is the third in a series of articles to give readers peace of mind when it comes to finance.