Every investor seeks a competitive advantage that increases their overall wealth. Nonetheless, tax-efficient investing is a strategy that some investors overlook. What’s the reason? Even modest tax reductions can have enormous effects on wealth accumulation. In one example from a report by Morgan Stanley, a 0.5% annual increase in after-tax returns caused a difference in the final wealth of 50% after 30 years of retirement income distributions. Several individuals are shocked upon realizing the returns on their long-term investments are taxed. Due to this, it might be more challenging for them to achieve their financial goals. Using Different Strategies The advantages of tax-deferral vehicles such as 401(k) and individual retirement accounts (IRAs) are well-known, so a tax strategy should naturally utilize these vehicles. Many people find it helpful to make pre-tax contributions to a 401(k) or tax-deductible contributions to an IRA and put off paying taxes for as long as possible. This lets investment earnings grow without the drag of up-front tax payments. Tax-deferred accounts like 529 plans and Health Savings Accounts (HSAs) make it possible to save money for future education and healthcare expenses. However, there are also lesser-known methods that can significantly increase your long-term wealth. Compared to a 401(k), the additional annual returns generated by lesser-known strategies may appear modest. However, just as the power of compound interest can cause small early-career contributions to balloon over decades, so too can small tax losses accumulate over a lifetime. Investors with a higher income who have maxed out their tax-deferred qualified retirement accounts may add additional strategies. This may include investing in tax-exempt municipal bonds. Tax losses can be applied to capital gains to reduce taxable income. As with qualified retirement accounts, tax-managed investment strategies work by deferring taxes until later. For investors with a high net worth, insurance, and annuity products can reduce the impact of taxes on their lifetime wealth. These consist of:
- Investment-Only Variable Annuities (IOVA). Those who have reached the contribution or income limits for qualified retirement accounts like 401(k) and IRA can direct post-tax savings to a non-qualified IOVA. The benefit of this is that investment gains are not taxed until withdrawn. Assets are not subject to the required minimum distributions (RMDs). This relatively new investment vehicle is designed for wealth accumulation. It lacks the more expensive features of other variable annuities, such as guaranteed withdrawal benefits, while offering a more comprehensive range of investment options.
- Index / Variable Universal Life Insurance. Another option for those who have maxed out their qualified retirement accounts, these policies combine the potential for wealth accumulation with protection for the investor’s family in the event of death. The policy purchaser pays premiums in the early years, most of which, after fees and the cost of insurance, are invested in the markets or linked to the performance of a stock market index. The cash balance may grow tax-deferred.
These products can be helpful on their own to increase tax efficiency. However, once integrated as part of a comprehensive tax strategy, their full potential to increase after-tax returns can be realized.
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Joe Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
