Are you frustrated by the increasing tax bite on your investment gains? The good news is that you can use one valuable tool to maximize tax-exempt growth inside your corporation and tax-free withdrawals from it: an immediate financing agreement.
What is an Immediate Financing Agreement (IFA)?
An immediate financing agreement (IFA) is a unique financial tool that allows permanent life insurance policyholders to benefit from the tax-exempt growth of corporate dollars inside their policy while having immediate access to the cash via leverage.
Leveraging is a method of borrowing in which you reinvest the borrowed cash in other vehicles, such as your business, real estate, or the stock market.
How an IFA Works
Through an IFA, you have the opportunity to access money that’s providing you permanent life insurance coverage and use it to invest and grow your wealth.
Think of it as buying a new investment property and getting a mortgage on that property to put into your business to invest and grow.
- Purchase a permanent whole life insurance policy that builds cash value.
- Make premium payments into the policy with corporate dollars.
- Take out a loan against the policy’s cash value, such as a line of credit.
- Use the money from the loan to put towards your business or other investment opportunities.
- The interest paid on the loan is often tax-deductible if you’re using the borrowed funds for investing.
With these types of policies, there is a maximum amount you can fund based on the life insurance coverage to keep the policy tax-exempt. This is known as the maximum taxable account reserve.
Now, the reason an IFA is so effective is because you’re not choosing life insurance as your only investment vehicle in the corporation or tying up a large amount of capital inside a life insurance policy. You can have access to the cash and the liquidity to take advantage of investment opportunities.
Over time, the permanent life insurance policy’s cash value and death benefit grows and compounds. This will result in a substantial death benefit that will create a CDA credit, allowing you to flow the proceeds out of your corporation completely tax-free to the next generation.
(Why is owning life insurance inside your corporation beneficial for business owners? We share 5 reasons why here)
The Benefits of Using an IFA Inside Your Corporation
Amongst the many benefits an IFA offers, the main benefits are the ability to grow money inside a corporation tax-exempt, cost-efficient permanent life insurance, and the build-up of Capital Dividend Account (CDA) credits that allow you to flow money from your corporation completely tax-free.
Let’s explore the benefits and financial planning strategies associated with IFAs inside a corporation.
Suppose you have built up some cash inside your corporation over the years of running a successful business (this cash is known as retained earnings).
Now, you want to invest and grow this money inside your corporation, but the problem is that the gains will be taxed at a rate above 50% because it is considered passive income, not active business income, which is taxed at 11%. Not only that but you will be taxed again personally when you withdraw the money from the corporation at a later date as personal income or a dividend.
This is where an IFA can come in handy. By flowing a portion of your retained earnings into a tax-exempt life insurance policy every year, you can invest and grow the funds tax-exempt and build up CDA credits, which allow you to get that money out of your corporation tax-free.
The idea of this strategy is not to purchase a large life insurance policy but to maximize the tax-exempt growth inside the policy and be able to borrow the funds immediately for other growth opportunities.
Using the IFA Strategy
We have helped clients eliminate millions of dollars in taxes and drastically increase their legacy with a customized IFA strategy.
One of our client’s IFA strategies inside their corporation will increase their legacy at age 85 by over $40,000,000, all without tying up their cash flow while funding their life insurance policy. This way, they can enjoy and grow the money while alive.
An IFA is a strategy business owners can use to grow their wealth. Implementing the strategy can be complex, so we recommend teaming up with a tax professional and financial advisor who are experienced in working with business owners to execute it properly. Book a call today.
