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SUCCESSSTRATEGIESAdvanced SalesCreatingTax-Diversified IncomeUsing whole life insurance in retirementDiversifying retirement savings among accounts that have differentincome tax treatment can go a long way to maximizing income.Whole life insurance purchased during the working years toprotect loved ones can also help to diversify income at retirement via: Tax-Deferred GrowthThe policy cash values grow tax-deferred Tax-Advantaged Withdrawals and LoansWithdrawals (up to cost basis) and policy loans can beaccessed on a tax-free basis when structured properlyRetirement savings challengesDiversifying taxation across sources of income addresses the followingchallenges faced in retirement:1. The unknown of where tax rates will be in the future2. The impact of taxes on growth and distributionsNOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION NOT FDIC OR NCUA-INSURED NOT INSUREDBY ANY FEDERAL GOVERNMENT AGENCY NOT GUARANTEED BY ANY BANK OR CREDIT UNION1
Tax Rates1. Where will taxes be at retirement?We do not know where taxes will be at any point in the future. However, in Chart A below, we canlook at the history of the highest marginal tax rates from 1913-2021 for context (consider that in thelast 20 years, taxes are near their lowest point).With the national debt at 30 Trillion in 2022, can taxes remain low?Chart AHistorical Highest Marginal Tax Rates: 1913-2021National Debt 30.4 Trillion100%Federal ReserveEconomic DataQ1 020032006200920122015201820210%At retirement, taxes can consume a large portion of a nest egg, leaving retirees shocked at just howmuch of their hard-earned savings is paid in taxes.Planning decisions can be made TODAY to help minimize taxes at retirement.2
Taxation of Savings2. The impact of taxeson growthA concern when planning for retirementincome is how to reduce and timeincome-tax liability. For example,high-income earners must decide in whichretirement accounts to place additionalsavings once the employer-sponsoredqualified retirement plan limit is met.(In 2022, the maximum pre-taxcontribution is 20,500, plus a 6,500catch-up contribution for those age 50 .)TAXABLE ACCOUNTS After-tax dollars in — taxablegains out Accounts provides flexibilityand liquidity Sometimes gains are taxedat favorable rate (Long-TermCapital Gains and QualifiedDividends) Some gains are taxed only asthey are realized Sometimes gains are taxed asOrdinary Income (Short-TermCapital Gains, Non-QualifiedDividends and Interest) Some gains are taxed annually(such as interest) No tax reduction for accountcontributions Examples: Bank Accountsand Non-Qualified BrokerageAccounts such as mutual fundsand stocksTaxAdvantagedExamples:Cash, checking,CDs, MoneyMarket,BrokerageAccountsTaxableExamples:Roth IRA, Roth 401(k),Muni Bonds, Cash ValueLife InsuranceTaxDeferredExamples:401(k), 403(b), 457,Traditional IRA, SEP,SIMPLE, Pensions,AnnuitiesConsider the tax-control triangleto diversify taxes in retirementTAX-DEFERRED ACCOUNTSTAX-ADVANTAGED ACCOUNTS Before-tax or after-tax dollarsin — taxable out Accounts grow and are not taxeduntil withdrawals are made Reduces tax burden on the yearscontributions are made toqualified plans Contributions and gains aretaxed as Ordinary Incomeupon withdrawal Contribution limits on qualifiedplan accounts Possibility for higher personaltax rates in future duringwithdrawals Possible Required MinimumWithdrawals at age 72 Possible Early WithdrawalPenalties Examples: 401(k), 403(b), 457,Traditional IRA, SEP, SIMPLE,Annuities After-tax dollars in — potentiallytax free out Accounts grow tax-deferred Typically no tax on growth,if conditions are met Contribution limits on qualifiedaccounts No tax reduction for accountcontributions Possible Early WithdrawalPenalties Examples: Roth IRA, Roth401(k), municipal bonds andcash value life insurance3
Benefits of Tax-Deferred GrowthTAXATION OF GROWTHWhen funds are taxed as they accumulate, the balance is impacted.A powerful long-term savings concept is tax deferral. In a tax-deferred account, taxes are generallynot due on investment earnings until withdrawals are taken. When tax is deferred on earningsgrowth, the balance will be higher over time than a traditional taxable account, all other things beingequal. Consider a hypothetical example of a 200,000 investment growing at 6% with the taxableaccount subject to an average income tax of 25% annually: 200,000 Balance Over Time: Taxable Growth Account vs. Tax-Deferred Growth Account 800,000 641,427 700,000 600,000 482,343 500,000 400,000 300,000 200,000 100,000 -01234567Taxable Account Balance891011121314151617181920Tax-Deferred Account BalanceTAX DEFERRAL MAY CUT THE AMOUNT OF TIME IT TAKES TO DOUBLEPaying taxes now increases the time needed to reach target savings. Consider how many years ittakes for a taxable and tax-deferred account to double using the same hypothetical 200,000investment in the example above:Tax-deferred: Takes 12 years to doubleTaxable Account @25% Annual Tax: Takes 16 years to doubleTaxable Account @37% Annual Tax: Takes 19 years to double0510YEARS15204
Life InsuranceWHAT TAX DIVERSIFICATION LOOKS LIKEAssume that Jane retires and plans to withdraw 120,000 annually from her 401(k) plan for herannual living expenses. Alternatively, assuming she did some income planning prior to retirement,she could take a combination of withdrawals from various income sources, including from herwhole life policy, with varying tax treatment for each. She could potentially increase her income.Chart B below illustrates how different types of accounts—taxed in different ways—can go a longway in addressing the uncertainty of future tax rates and the impact of those taxes on growth, andultimately, on disposable income at retirement.Chart BNON-DIVERSIFIED WITHDRAWALSMutualFundWholeLife401(k) Plan(35% Tax)Withdrawal--120,000Income Tax--42,000Net Income--78,000DIVERSIFIED WITHDRAWALSTotal NetMutual FundIncome(22% Tax)1(All Sources) 78,000WholeLife2401(k) Plan(35% 00Total NetIncome(All Sources) 97,2005
Life InsuranceChart CUSING WHOLE LIFE INSURANCE TO HELP DIVERSIFY INCOMENON-GUARANTEED VALUESTaxEquivalentIRR onNet Cash IRR on NetCash ValueValue(@28%)CumulativeDistributionsNet %Annual CumulativeAnnualPremium Premium 2Chart C assumes the use of a Whole Life 15 Pay on a female, age 45, Ultra Preferred Non-tobaccorisk class with an initial face amount of 1,000,000. Premiums of 41,280 are paid for 15 years.Annual distributions of 40,000 are taken age 67 through 85. Chart C is a supplementalillustration that is not valid unless accompanied by the basic illustration. Refer to the basicillustration for assumptions, explanations, guaranteed elements and additional information. Thevalues shown here are taken from the current assumption of non-guaranteed values.These illustrated amounts are not guaranteed. They include dividends, which are neither estimatesnor guarantees, that have been applied to purchase paid-up additions based on the 2022 dividendschedule. The dividend schedule is reviewed annually, and it is likely that dividends in future yearswill be lower or higher depending on the Company’s actual experience. For this reason, we stronglyrecommend that you look at a lower dividend schedule illustration.6
Contact Advanced Sales at 1-800-601-9983 Option #2or email MMSDAdvancedSales@MassMutual.comFOR FINANCIAL PROFESSIONALS. NOT FOR USE WITH THE PUBLIC.Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every taxsituation, and should not be construed as legal, tax or accounting advice. Clients should consult with their qualified legal, tax,and accounting advisors regarding their own particular situation.1 In this example, the 22% tax is based on a hypothetical average tax rate that includes long-term capital gains at 20% andqualified dividends at 35% ordinary income tax.2 Loans and withdrawals from a cash value life insurance policy will reduce the death benefit, and cash surrender value maycause the policy to lapse. Lapse or surrender of a policy with a loan may trigger taxation. Policies classified as ModifiedEndowment Contracts (MEC) may be subject to tax when a loan or withdrawal is made, and a 10% penalty may apply if the loanor withdrawal is taken prior to age 59½. 2022 Massachusetts Mutual Life Insurance Company (MassMutual ), Springfield, MA 01111-0001.All rights reserved. www.MassMutual.com.AS9009LI 622CRN202306-283577
Whole life insurance purchased during the working years to protect loved ones can also help to diversify income at retirement via: . illustration that is not valid unless accompanie d by the basic illustration. Refer to the basic illustration for assumptions , explanations, guaranteed el ements and additional informat ion. .
