Just intuitively, tax-free sounds better than taxable. So, let’s say that you have a bunch of money in your traditional retirement plan. And we talked about Roth IRA conversions, which is terrific.

But if you have sufficient assets and you’re not only thinking about yourself, but you’re also thinking about the next two generations that follow, one of the interesting strategies (and this works as a matter of math) assuming that you can afford it, is you take some of your retirement plan money even before you have to … (so this is before required minimum distributions, and we’re not going to do a Roth IRA so now we’re violating our bedrock principle) … you’re taking some of your retirement assets and you’re cashing them in. Now you have to pay the tax. Now you have a bunch of money for which you have already paid the tax.

Then you use that money for some form of a gift to your, presumably your heirs, your children, your grandchildren, or the person that you want as the beneficiary, and you have that person invest in something that grows income tax-free.

So, what kind of vehicles might the beneficiary of your estate (or most likely your kids or your grandkids) could they invest in? Something that is tax-free? Well, you might consider a 529 plan.

So, think about this. You’re taking a retirement plan, and you’re cashing it in (not all of it, obviously but let’s just say a portion). You’re cashing it in, you’re paying the tax, you’re taking what’s left, and then you’re contributing that to a 529 plan, which now grows income tax-free.

So really, that’s kind of like a Roth, right? You’re paying the taxes and you’re investing it in something that’s going to grow tax-free. But with a 529 plan, that’s not in your estate. So, you’re actually saving estate tax, and the 529 plan has a lot of obvious benefits, most likely for a grandchild.

The other thing is you could say, “Okay child, I’ve cashed in some money from an IRA or retirement plan. I’ve paid the tax on it. I have this money left. I’m going to gift it to you. Please use this money for your own retirement plan contribution (preferably in your Roth 401(k), your Roth 403(b), your Roth IRA, etc.).” Something that is common, and easy, and is tax-free, and will also grow outside of your estate.

Another possibility would be life insurance. You take that money (and this is not a new concept, people have been doing this since, I hate to say it, but probably well before this but they were doing this in the seventies), where you cash in a portion of your retirement plan, pay the tax, take the resulting money, and use it to buy a life insurance policy.

Ideally, that policy, if it is done right, will be not subject to income taxes, not subject to estate taxes, and will be tax-free. Like the insurance company and the insurance agents like to say, “When the policy matures.” In other words, when you die.

And by the way, that really, again, is like a Roth IRA conversion. You’re taking some money, you’re paying taxes before you have to, you’re taking what’s left, and you’re putting it in something that grows tax-free. And life insurance, subject to exception, does grow tax-free and estate tax-free. So those exceptions to our general rule — don’t pay taxes now, pay taxes later except the Roth — are potentially very important.

I’ve actually done two-hour workshops for CPAs on that exception alone. And I will tell, you as a practical matter when we run numbers (which again I’m going to go back to saying isn’t a matter of opinion, it’s a matter of math), people’s families end up with a lot more purchasing power and a lot more money — if they are good candidates to follow this principle.

Don’t pay taxes now, pay taxes later in the accumulation stage, distribution stage, the estate planning stage. But there are exceptions as we have gone through in one video on the accumulation stage. And in this video, we just covered some of the exceptions to the bedrock principle in the distribution stage. I hope this helps!