Putting the Power of Tax Deferral to Work for You

Retirement Realities

Building a nest egg for the “golden years” of retirement can be quite a challenge. There are, however, certain retirement programs that give investors a decided advantage when saving and investing for the long term. They offer the advantage of tax-deferred growth, and they should be the cornerstone of any comprehensive retirement savings program.

How Tax Deferral Works

Uncle Sam has conferred on certain financial vehicles a powerful advantage: tax-deferred growth. This means that appreciation, earnings, interest and dividends on assets in a tax-deferred vehicle are not taxed until the funds are withdrawn. As long as the funds remain in the account, they grow without taxes eroding their value. This enables assets to accumulate at a faster pace, giving you an edge when saving for the long term. And, when you withdraw funds after you retire, you may be in a lower tax bracket and be able to keep more of what you’ve accumulated.

Taxable vs. Tax Deferred

Tax-deferred contributions and primary purpose of life insurance is to provide financial protection, permanent plans also offer the benefit of tax-deferred growth of cash values. Plans such as whole life, universal life and variable life build cash value, which grows on a tax-deferred basis. With innovative variable plans, you may allocate your money across several sub-accounts.

 

Although this may help build cash value, returns are not guaranteed and will fluctuate according to investment performance. Many policies offer a loan option that allows you to tap into cash value at competitive interest rates. While this is a valuable feature, keep in mind that borrowing against a policy reduces its insurance protection. Loans will affect your cash values as well.

Designed for The Long Term

What products offer the advantage of tax-deferred growth? Programs specifically designed to help people accumulate funds for retirement – such as 401(k)s, 403(b)s, SIMPLE-IRAs, Traditional IRAs and annuities — are given this valuable tax benefit. Because these products are intended for the “long haul,” early withdrawals can create stiff tax consequences.

 

In most instances, withdrawals from tax-deferred vehicles are subject to taxation. In addition, early withdrawals before age 591/2 may also be subject to a 10% or 25% penalty. Keep in mind that these plans are primarily for retirement savings, and using them appropriately will afford you the fullest benefits.

Annuities

In recent years, annuities have gained prominence as an excellent vehicle to supplement retirement savings. An annuity is a contract with a life insurance company that can provide you with a stream of income for life. The annuity can be “deferred,” whereby you accumulate money over time, to be paid out at some future date, or “immediate,” where payments begin shortly after purchase. The rate of return for an annuity can be “fixed” or “variable.” With a fixed annuity, the interest rate is guaranteed for a specific period of time by the insurance company.

 

Funds within annuities accumulate tax-deferred, and you can choose from a variety of pay-out options when you start receiving income. Keep in mind that withdrawals are taxable, and if you are under age 591/2, the withdrawals may be subject to a 10% penalty on any gain or profit. Like life insurance, annuities offer a guaranteed death benefit, which can provide valuable financial protection. Unlike other tax-deferred vehicles, annuities generally do not have a contribution ceiling, making them an ideal option for individuals who have “maxedout” their employer-sponsored plans and IRAs.

Permanent Life Insurance

Although the primary purpose of life insurance is to provide financial protection, permanent plans also offer the benefit of tax-deferred growth of cash values. Plans such as whole life, universal life and variable life build cash value, which grows on a tax-deferred basis. With innovative variable plans, you may allocate your money across several sub-accounts. Although this may help build cash value, returns are not guaranteed and will fluctuate according to investment performance. Many policies offer a loan option that allows you to tap into cash value at competitive interest rates. While this is a valuable feature, keep in mind that borrowing against a policy reduces its insurance protection. Loans will affect your cash values as well.

If you have questions about these tax deferral strategies, feel free to call me at

925-757-6018 or send me an email at jblanco@smeefinancial.com

 

Pablo Blanco - Insurance Agent & Financial Advisor | License# 0000000 | Habla Espanol

 

 

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