According to the old adage, there are two things which are unavoidable: death and taxes.
But the adage, it turns out, is wrong --or at least half wrong.
Because while it's true that there isn't much we can do to avoid dying, there's lots we can do to reduce, and in some cases eliminate, taxes.
By making a few smart money moves today, retirees or those approaching retirement can take currently taxable income and convert it into tax-free retirement income without laying aside one penny more than they currently are saving.
The process is called "asset allocation", and it involves repositioning a portion of assets to take advantage of the favorable tax treatment afforded certain kinds of insurance and annuity products.
The result is very often an increase in after-tax retirement income, combined with a decrease in income and estate taxes.
Could it work for you? Consider the following example: Mr.
and Mrs.
Jones, both age 53, are working hard to prepare for retirement.
With combined Federal and state taxes, the Jones are in a 40% tax bracket.
Among their various investments, which include a 401(k) plan and several IRAs, the Jones also own a non-qualified $60,000, 5-year certificate of deposit currently earning 6%.
At this rate, the CD is projected to grow to $120,000 by the end of twelve years.
The Jones earn $3,600 interest annually on this investment which, given their tax bracket, results in a $1,440 tax payment every year.
Stretched out over 12-years, those tax payments add up to over $17,000.
When they retire at age 65, the Jones plan to take an income of $7,200 a year from the interest it generates.
Based on their current tax bracket, they will realize a net after-tax income of $4,320.
Now it is 12 years later and the Jones have begun drawing income from their CD.
Under current tax law, that income will be factored into whether or not --or how much of-- their social security benefit is taxed.
And when the Jones die, the $120,000 (or remaining) principal in their CD will be factored into whether or not --or how much of-- their estate is taxed.
Additionally, the money will have to go through the probate process before it can be passed on to the Jones heirs, resulting in delays and additional costs.
Now let's assume that instead of keeping that money in the CD, the Jones transfer their $60,000 to a Single Premium Deferred Annuity (SPDA).
First, because interest earned in annuities is not currently taxable, the Jones immediately reduce their annual tax liability on that $60,000 from $1,440 to zero, for a total tax deferral of $17,280 over the 12 years --money that can be invested elsewhere or used for other purposes.
For the purposes of this illustration, let's assume that the Jones use this money to purchase a joint and survivor life insurance policy with a face amount of $120,000.
When the Jones retire in twelve years, given current rates, policy values should be sufficient to pay all future premiums due on the policy.
When the Jones die, this money can be left to their heirs income tax free.
And with proper estate planning, the Jones can remove these insurance proceeds from their taxable estate altogether.
Second, at the end of 12 years, (again assuming current rates), the Jones can begin drawing $9,591 annually from the annuity, resulting in an after-tax income of $6,579- a full $2,259 more than they would net from the CD arrangement! And finally, should the Jones require access to their money during the 12 years their money is growing, many SPDAs permit penalty-free withdrawals of up to 10 percent of account values each year or penalty-free withdrawals of interest at any time.
When either of the Jones die, the other continues to receive the income from the annuity, and when both have died, the balance of their annuity proceeds can be left to their named beneficiary without the cost and delays often associated with probate.
So what have the Jones gained by repositioning that $60,000 CD? They've eliminated current income taxes freeing up money for other uses; they've increased their after-tax retirement income; they've very likely decreased their probate expenses and estate taxes; and they've left income tax-free insurance proceeds to help settle estate costs and pay final expenses.
Interested in cleaning up your financial picture? Consider today's annuity products, designed to help you get the most from what you've worked hard to build.