Tax time is here. April 15 is the filing deadline. If you’re like most Americans, you’ve probably already filed your tax return. Were you disappointed with the outcome? Perhaps you owed more than you’d expected, or maybe you didn’t get the refund you wanted.
There are many reasons why people face larger-than-expected tax bills. You may have withheld less than needed from your paycheck. Or perhaps you had investment gains that inflated your tax exposure. Perhaps you had a windfall or bonus that pushed you into a higher tax bracket. As you get closer to retirement, taxes can become a more dangerous risk. Every dollar you pay in taxes is a dollar that can’t be saved for retirement. Once you enter retirement, taxes can reduce your income and limit your ability to live a comfortable and enjoyable lifestyle. Fortunately, there are steps you can take to minimize your tax exposure. Of course, you need to develop a long-term plan to fully prepare for tax risk. If you wait until filing time to minimize your tax exposure, you may have few options available. One option to consider as part of your long-term tax strategy is an annuity. Annuities are financial tools that can be used to achieve a wide range of long-term goals. Some annuities provide income that’s guaranteed* for life, no matter how long you live or how the financial markets perform. Other annuities limit your exposure to downside market risk. Some annuities help you achieve multiple goals. Annuities can also offer tax benefits. Below are a couple of ways in which an annuity could reduce your tax exposure and enhance your retirement strategy: Tax-Deferred Growth Some annuities allow you to increase your funds over an extended period of time. These products, known as deferred annuities, offer a variety of growth vehicles. Some pay a set interest rate over a defined period of time. Others allow you to invest directly in the financial markets. And others pay interest linked to the performance of a market index. No matter how the growth is achieved, one thing is true for all deferred annuities: All growth is tax-deferred inside the contract. That means that as long as the money stays inside the policy, you don’t pay taxes on growth. You may be familiar with tax deferral from investment vehicles like your 401(k) or IRA. Tax deferral in an annuity works similarly to how it does in those accounts. You don’t pay taxes on growth inside the policy. However, you may face taxes when you decide to take income. Also, you could face an early distribution penalty if you withdraw money before age 59½. If you’ve already maximized your savings to your 401(k) and IRA, you might consider using an annuity to achieve additional tax-deferred growth. That could reduce your tax exposure on investment growth and allow you to accumulate more assets for retirement. Annuitized Income Another potential annuity benefit is the ability to create guaranteed* lifetime income. There are a couple of ways to do this, but one of the most common approaches is to annuitize a lump sum of money. When you annuitize, the insurance company converts a lump-sum amount into a guaranteed* income stream. That income lasts for life, no matter how long you live or how the financial markets perform. Annuitized income includes two components. The first is a return of your own premium dollars. The second is accumulated interest. Assuming you used nonqualified dollars to fund the annuity, the return of premium component isn’t taxable. Simply put, a portion of your annuitized income is taxable, and another portion isn’t. The exact amounts that are and are not taxable vary based on the specifics of your contract. When you choose to annuitize your assets, the insurer will provide an exclusion ratio that tells you what percentage of the income is tax-free. Annuitized income can help you create lifetime income. However, it can also help you take advantage of tax-free income. Those two benefits could help you enjoy a more predictable and financially stable retirement. Ready to develop your tax strategy? Let’s talk about it. Contact us today at First Fidelity Group. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation. *Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency. 18687 - 2019/3/25 April showers bring May flowers. The old saying reminds us that while rainy weather isn’t ideal, it usually leads to better days ahead. Of course, rainy days in your retirement strategy are a different story. An emergency or unexpected financial setback could disrupt your plan and limit your ability to enjoy a comfortable retirement.
Fortunately, there are tools you can implement to protect yourself from financial rainy days in retirement. One of them is life insurance. Yes, life insurance is primarily used as a protection tool for death, but that’s not the only thing it can be used for. In fact, it offers several benefits that could help you overcome a wide range of financial challenges in retirement. Is life insurance a part of your retirement strategy? If not, it may be time to consider it. Below are three ways you can use life insurance to protect yourself from financial rainy days: Death Benefit Protection A wide range of risks could threaten your retirement strategy. There’s market volatility, inflation, health care costs and much more. Death is one of the biggest risks, however, because of the financial challenges it could create for your surviving spouse. Life insurance helps your spouse and other dependents overcome those challenges. They receive a lump-sum, tax-free benefit that they can use to cover living expenses, pay down debt or fund the remainder of their retirement. Risk-Free Growth It’s natural to become more conservative as you enter retirement. However, many retirees make the mistake of eliminating risk altogether from their strategy. Often, risk-free investments also have limited growth potential. If you don’t continue to increase your assets throughout retirement, you may struggle to keep up with inflation or to fund your lifestyle. Some life insurance policies offer cash value accounts that can grow on a tax-deferred basis. For example, whole life policies pay annual dividends. Universal life policies pay interest. Indexed universal life policies offer variable interest rates linked to the performance of a market index. All of these policies offer downside protection. You can grow your cash value on a tax-deferred basis, but you’ll never lose money because of market volatility. Tax-Efficient Distributions When you face a rainy day in retirement, you may need a little supplemental income. A life insurance policy can provide that extra income, and it can do so on a tax-free basis. You can always withdraw your premiums tax-free from your policy’s cash value. Premium dollars are distributed before accumulation, so your initial withdrawals are usually tax-free. You also have the option of taking tax-free loans from your life insurance policy. These distributions can include either premium dollars or growth. The distributions have to be repaid, and that’s usually done as an add-on to future premium payments. If you pass away without repaying the loan, the balance is deducted from the life insurance policy. You can use your life insurance cash value to generate regular, predictable, tax-efficient retirement income, or you can simply keep it as a rainy-day fund to cover unexpected costs and emergencies. Ready to establish your life insurance rainy day fund? Let’s talk about it. Contact us today at First Fidelity Group. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency. 18673 - 2019/3/20 |
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