Tax Strategies
To Maximize Income in Retirement NOW is the Time to Plan Tax Strategy
People figured out it's more efficient to eat their food using a fork, knife, and spoon instead of using, let's say, three forks. Similarly, in our firm, we break down all financial instruments into three types of vehicles that you can use to set aside money for retirement.
We call them Tax Me Now, Tax Me Later, and Don't (Ever)Tax Me Again vehicles. Proper allocation among these can allow you to help enhance your retirement distributions by controlling how and when you are taxed.
Before, a typical allocation was heavily invested in Tax Me Later and Tax Me Now vehicles. Our mission here is to change that and promote the Balanced Approach- equal diversification among all three types of vehicles.
Why is this important, you ask me? In short, it's not necessarily how much money you have that is important—It's how much you get to keep that matters.
Unfortunately, most people typically don't consider how their assets are taxed. The fact is, just a small correction in funds allocation makes a tremendous difference- I'm talking tens and even hundreds of thousands of your hard-earned dollars.
The most neglected financial vehicle type is Don't (Ever)Tax Me Again. Those include Municipal Bonds and Bond Funds, Roth IRAs and 401Ks, and last but not least, Cash-value Life Insurance.
Cash-value life insurance is one of the most tax-advantageous investment vehicles around. Some of its notable tax advantages include:
Qualified Plans like your Traditional 401(k) and IRA are so-called Tax Me Later retirement vehicles. They grow cash tax-deferred and are taxable in retirement. Make sure to ask your financial advisor to explain the importance of the current marginal blended tax during the contributing and accumulation phase and how it affects the net spendable income calculation during the distribution phase at retirement..
Qualified plan distributions are also included in provisional income for social security benefit taxation. Keep in mind that 401Ks are employee plans subject to Social Security and Medicare taxation before contributions.
Non-Qualified plans, like Cash Value Life Insurance, are not tax-deductible but do accumulate tax deferred and may be tax-free and, if so, are not included in the provisional income test for social security benefit taxation.
What makes Cash Accumulating Life Insurance policy stand out compared to your Qualified Plans (like 401ks, IRAs, 403Bs, etc.) are the following:
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The Deferral Tax Trap:
Do you want all your liquid assets in your 401(k) and IRA?
Many things have changed in the past decade. One is that the likelihood of raising taxes is much greater now than it was before the recession-crash-election. The old thinking was that you should defer tax bills until "you are in a lower bracket at retirement." The higher bracket is more like it. If you are 45 and prosperous, plan on significant federal deficits and higher income taxes when you retire in twenty-plus years.
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Taxpayers have a hidden debt of at least $53 trillion in government obligations, mostly from Medicare, Social Security and the federal debt. The government would have to double taxation or cut benefits in half immediately to make good on its promises of providing health care and pension benefits for retirees in the coming decades. Both major political parties have avoided confronting the problem for fear of angering voters.
SO, WHAT CAN WE DO?
Before they found us at Tesla Wealth, many of our clients had jumped on the bandwagon of saving for their retirement exclusively in Qualified Plans because it was the "right" thing to do. However, later they learned that deferring to pay taxes with Qualified Plans savings could result in additional, hefty taxes on Social Security income, proving most of the retirees' expectation of being in a lower tax bracket retirement wrong.
For that reason, we help our clients take a different unbiased look at the overall future taxes to determine the most tax-efficient way to save today.
Our team at Tesla Wealth Management is on the mission to educate people that there are additional ways beyond tax-deferred accounts to save for retirement that take less risk and result in tax-free income streams for the rest of their lives.
Learn more about our Balanced Tax Approach and how to use Cash Value Life Insurance in your Retirement Planning.
