Infinite banking, also known as the "be the bank" strategy, is a way to use a whole life insurance policy as a savings and spending vehicle. By paying premiums into the policy, policyholders can build up cash value that can be borrowed against for various purposes, such as paying for education or buying a new car. However, as with any financial strategy, it's important to consider the tax implications of infinite banking when planning your finances.
With that said, here are 4 reasons why you should use Infinite Banking as a tax strategy 👊
1. Cash Value
First, it's important to understand that the cash value of a whole life insurance policy grows on a tax-deferred basis. This means that you do not have to pay taxes on the interest and dividends that accrue within the policy as long as the policy remains in force. However, if you withdraw cash value vs take out a loan from the policy, you may have to pay taxes on the withdrawal. The tax implications of money received will depend on whether the withdrawal is considered a loan or a distribution (withdrawal), and whether the policy is considered a modified endowment contract (MEC).
A loan taken from the cash value of a whole life insurance policy is not considered a taxable event. The loan is not considered as a withdrawal (distribution) of cash value, however, it is not considered as taxable income because the policyholder is technically borrowing the life insurance company's money. However, interest paid on the loan is tax-deductible.
3. Withdrawal or Distribution
A withdrawal or distribution, on the other hand, is considered a taxable event. If you withdraw cash value from the policy, the amount withdrawn will be considered as income and will be subject to taxes. Also, if the policy is considered a MEC (Modified Endowment Contract), the distribution will be subject to an additional 10% penalty tax.
4. Loan Repay
It's important to note that if you borrow from the cash value of a whole life insurance policy and then do not pay the loan back, the unpaid portion of the loan will not be considered as earned income or distribution. Instead, it will be deducted from the death benefit upon the death of the insured. This means that the beneficiaries will receive a death benefit that is reduced by the unpaid loan amount. It's important to consider this when borrowing from the cash value of a policy and if not repaid then the death benefit will b e reduced.
When planning your taxes with an infinite banking policy, it's important to consult with an infinite banking practitioner like https://www.iownmybank.com and a tax professional to ensure that you are aware of the potential tax implications, if any, of your actions. Additionally, you should be aware of the tax laws and regulations in your state that can impact the taxability of the policy.
In conclusion, infinite banking can be a valuable tool for building wealth and achieving financial goals, but it's important to understand the tax implications of the strategy and to plan accordingly. By working with an infinite banking practitioner and a tax professional, you can ensure that you are using your policy in the most tax-efficient way possible and maximizing the benefits of the strategy.
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