Keep More Of Your Money | Tools Of The Ultra-Wealthy

Let’s have an honest conversation about your retirement plan. Most people just give their money to Vanguard, Fidelity, or some big box firm. We hope and pray they do their job without investing any time to understand what they are doing.

Pretty standard, as you are an expert at what you do and they are presumably experts at what they do, right?

We would like to believe that because they are in the media, federally regulated, and since they have been around forever, all these factors indicate credibility.

If this were true, then why have most actively managed funds trailed the S&P 500 performance for nine straight years in a row? The reality is, they have shareholders and expenses and great marketing teams that get you to believe what they want you to believe.

If we look at how the ultra-wealthy behave, there are things we can emulate to create the same advantages they enjoy, despite what you may believe. You don’t have to settle for the generic, cookie-cutter approach everyone else follows.

So, what’s the alternative? I’m glad you asked!

To look at alternatives we must first understand what are the current options. It has become conventional knowledge that to have a successful retirement plan we must utilize one or more of the following accounts. A 401(k), 403(b), 457, solo 401(k), SEP IRA, Simple IRA, or Roth IRA to name a few.

All of these plans have benefits and drawbacks as nothing is perfect. In qualified accounts, typically the contributions are tax-deferred. When we take distributions or pull money out, whatever the current tax rate is, that’s what you pay to good old Uncle Sam. The thought process behind deferring taxes is that your tax bracket will theoretically be lower.

However, studies by the Brookings Institute found the opposite. Tax brackets were the same if not higher in retirement years because people did not have the same amount of deductions. Their houses were typically paid off, they were no longer working, and their kids had grown up and moved out so no more dependents to claim.

Well, how about a Roth IRA? Sure they are great! You pay the taxes today, which we highly recommend considering because taxes are at historic lows. Despite increased government spending, including the unprecedented $5 trillion stimulus package. (Ideas on how to spend your $1,200 to come.) However, the Roth IRA has many limitations, especially for the typical clients we work with. If you’re single and make more than $139,000 or $206,000 for married couples, you cannot contribute at all.

Even if your income qualifies for a Roth IRA, maximum contribution limits per year are $6,000. If you happen to start contributing when you’re very young this can create you a decent retirement fund. If you wait too long though, $6,000 is just not going to move the needle fast enough.

So, what do you do?


The following statements are of my personal opinion of the author and not based on facts or represent Healthier Money’s organizational views.

At its inception, the 401(k) was a tool for wealthy people. It allowed them to get paid massive salaries AND grow their money through this tax-exempt vehicle. I feel like I need to state this again. At its origin ALL contributions, up to the limit, were tax-exempt. And the limit back in 1978 was $45,475. That is equivalent to $188,178.63 in today’s dollars!

Then, in 1980 this guy Ted Benna came along, we will learn more about him later, he messed it all up. Ted, an attorney and benefits consultant, found a new way for his a client to move away from private pensions, which had their problems, and to place the responsibility of their employees’ retirement on the government.

This guy was a genius and his idea lead to the mass movement of companies adopting his 401(k) plan. It happened so fast that Congress had to pass official legislation amending the rules governing Section 401(k).

So, this guy ruined this amazing tax vehicle for the wealthy, what were they to do next? Because if there is one thing that wealthy people want, it’s retaining their wealth. So a few years later in 1984, Section 7702 was born. Now here is where things get fun for me.

Let’s review the timeline, shall we?

In 1978 some wealth executives decided the 70% tax rate was too high. So, they lobbied Congress for some reforms and a tax break. This resulted in the Revenue Act of 1978 allowing people to contribute up to $45,475 into a completely tax-exempt investment! Then Ted comes along, who I believe was truly looking out for people, and he sees this obscure section in the tax code. He then figures out that he can use this language to say, not only can employees participate in their retirement but employers can match their contributions… in a tax-friendly way.

Not only did the new 401(k) plans allowed employees to contribute pre-tax dollars, the fees associated were minimal and paid by the companies. In a recent article, Benna said, “I’ve been quoted saying I would wipe out the whole thing. What I was referring to was the investment structure, not the 401(k) entirely… It went from all fees being paid by the employer to everything getting bundled and dumped on employees.”

n my opinion, I feel that most wealthy people will find more ways to keep more of what they earn and will go to great lengths to make that happen. This is why we need to examine the habits of people who are at levels we aspire to achieve and simply do as they do.

*End of opinion*

Back to the point.

So, the question I proposed before, is what do you? The answer is simple. Do what the rich do!

The rich pay people to research them and find the financial tools that allow them the most favorable taxation. Let’s take a closer look at the 401(k) to give you some context on how and why it came to be and how it’s changed over time.

U.S. Tax Code Title 26 Section 401(k)

In 1978 Congress passed into law The Revenue Act of 1978, which included a provision that became IRC. Sec. 401(k). This said that the portion of income that employees opt to defer, otherwise known as deferred compensation, will not be taxed.

At the inception of the 401(k), it was mostly used as a way for highly paid individuals to put money into investments on a tax-exempt basis. All contributions reduced total income and were tax-exempt! Despite the power of the original 401(k), it was an obscure law that not many people knew about. Until 1980 when benefits consultant and attorney, Ted Benna recommended that a client utilize this little known law as a tax-advantaged way for their employees to save retirement.

When the client declined to implement this new 401(k) plan, Benna took it to his own company. Ironically, The Johnson Company, the family who founded Fidelity, implemented the first 401(k) plan in America. At that time employees could contribute 25% of their salary or a total of $30,000 annually. This new concept spread like wildfire and by 1981 the majority of large corporations had adopted this new way to help employees save for retirement. Companies like Johnson & Johnson, FMC, PepsiCo, JC Penney, and Hughes Aircraft Company developed 401(k) plans for their employees.

The adoption of 401(k) plans happened so fast that by 1981 the IRS issued regulations. These regulations sanctioned the use of employee salary reductions as a source of retirement plan contributions. These plans were so attractive that most companies replaced older, after-tax thrift plans and pensions with 401(k)s

Since this wide-spread adoption, additional reform took place and most significantly in 1984, the Deficit Reduction Act of 1984.

Remember, wealthy people always find ways of not only making money but keeping it. They know that in most financial matters, they have a partner, the IRS. If there is one thing wealthy people want, besides making money, it’s keeping the IRS’s hands off of it.

Unfortunately, the reformation on the 401(k) caused a major problem for most highly paid individuals that I referenced earlier. They were no longer able to defer their compensation on a tax-exempt basis, they needed a new vehicle!

Life Insurance

That’s right, life insurance. Before 1984 there was no official definition of what people were able to do within life insurance policies. They were stuffing as much cash as possible into policies because once money got into a life insurance policy the government could never touch it again.

The main reason is death benefit traditionally took care of widows and children. To tax that money is socially irresponsible. Like most good things, people took advantage and it. This resulted in the Deficit Reduction Act of 1984 which gave us Section 7702, Title 26 of the U.S. Tax Code.

These new rules sought to shut down what Congress considered an abusive use of the tax code by using life insurance policies as investment vehicles.

By the late 1970s and early 1980s, new insurance products were being created. One type was Universal Life insurance, which paid close attention to market-rate interest. These old Univeral Life policies are similar to today’s, Index Universal Life policies. These policies credit interest based upon the performance of an underlying index, like the S&P 500. This meant that policy-holders had the opportunity to earn interest based on the performance of the stock market.

Unfortunately, the resulting laws of 1984 and late 1986 put further restrictions on the use of life insurance. President Reagan’s administration that sought to tax the build-up of cash-value within life insurance policies. Thankfully, that was not passed which leads us to today.

We have all been taught that to build a good retirement we must defer into qualified retirement accounts like a 401(k) or Roth IRA. However, no advisor tells their clients about the power of life insurance and how it can grow TAX-FREE.

As I mentioned, the ultra-wealthy have many resources and the desire to keep more of what they earn.  Life insurance can be a valuable asset in your financial strategy, offering much more than just death. benefit protection. This is why even banks, like Bank of America, holds over $22 billion in life insurance and lists it as an asset on their balance sheet.

BofA FDIC Asset Report

BofA FDIC Report

Through our creative and skillful design of life insurance products, we can create the best, tax-advantaged, plan, based on your needs.

To find out more and learn if you can benefit from Section 7702 and the tools of the ultra-wealthy, click this link and schedule a 30-minute phone call. It’s a free, no-obligation call to see if we can help you. After the call, sleep on it. If you want to move forward we will design a plan that fits your needs.

If you want what everyone else has, do what everyone else does. When you’re ready to make a change, we will be here for you.

Thank you for your time and attention!

Live Lone and Profit

Kyle Petyak

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