What must investors do to adapt and succeed throughout their retirement?
Understanding the interaction between investment vehicles and taxes is crucial to the success of the distribution and transfer phases. If you were a farmer, would you rather save tax on the purchase of your seed in the springtime and pay tax on the sale of your harvest in the fall, or would your rather pay tax on the seed and sell your harvest without any tax on the gain? I would prefer tax-advantaged harvests.
There are only two vehicles that are considered to be truly tax-free. The first vehicle is the Roth IRA. Though they are funded with after-tax funds, they are potentially never taxed again. Until 2010, Roth IRAs have had too many strings for wealthy investors to be able to invest. However, as of 2010, the IRS eliminated the age and income restrictions for Roth conversions. They are even allowing for Roth conversions to be reported between tax years 2011 and 2012.
The second vehicle considered to be tax-free is life insurance. Modern cash-value life insurance can be designed to accrue cash safely, provide tax-favored distribution benefits and deliver tax-favored proceeds during the transfer phase. If designed appropriately, life insurance can also maintain liquidity within the account and earn an attractive rate of return.
Both vehicles provide tax benefits throughout the distribution phase of retirement. Neither account is subject to income tax if funded appropriately. In addition, income derived from a Roth or life insurance policy will not affect the taxation of Social Security earnings. Thus, you could avoid paying income tax on up to 85 percent of your Social Security benefits at retirement.
Chris Kichurchak is the president of Noble Financial Group. Reach him at (216) 236-0101 or [email protected].