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Tax Diversification

TAX DIVERSIFICATION ( life insurance ) In the developed world, we are living for longer and living costs are rising, but many of us still think that whole life insurance policies are worthwhile only for the death benefit. In fact, there are significant additional benefits to using the policy during our lifetimes as well. YOU READY FOR THE LONG HAUL? $$$$$$ $$$$ $$$ $$$ TOP REASONS PEOPLE USE LIFE INSURANCE As forced savings to create cash values to use for future life events To provide death benefit For estate planning For charitable giving TAXES As a vehicle to provide additional tax diversification Tax diversification is an important reason which many people don't know much about yet. It makes sense to diversify our taxes now – the earlier the better – to get maximum benefits throughout our long lives, not just at the end. WHY PLANNING TO HAVE SEVERAL DIFFERENT INCOME SOURCES THAT OFFER VARYING DEGREES OF TAX DIVERSIFICATION DURING YOUR LIFETIME IS IMPORTANT. We are living longer. Life expectancy in the U.S. is now eight years longer than it was in the 1970s. For U.S. men, the average life expectancy is 76, while for U.S. women it's 81. Social security benefits are running out. Social Security's reserves are expected to run out by 2033. Nearly 20% of the population receives benefits from the 78-year old programme. 000 The rising cost of living means we need to be more careful with the money we do have. The U.S. consumer price index rose by 1.2% in the 12 months to November. We are planning on retiring later. The average American now expects to retire aged 67, four years later than those polled a decade earlier, and seven years later than those polled fifteen years ago. 65 The government has pushed back the age at which people can get full benefits during retirement, to 67 from 65. YOUR INVESTMENT ACCOUNTS If, like many, you're in the middle of planning for retirement, you're likely to have several different types of investment accounts. Investment accounts normally fall into one of three categories: taxable, tax-deferred and tax-favored accounts. TAXABLE ACCOUNTS 1) (pre-tax dollars in with fully taxable dollars out): (after-tax dollars with potential income taxes along the way): Deductible Traditional IRAS • Money Markets - 401(k) Plans - Qualified Annuities • CDs • Mutual Funds • Stocks • Pension Plans • Defined Benefit Plans • Non-qualified Deferred Compensation Plans • Bonds • Real Estate Rentals INCOME TAX DIVERSIFICATION 2) (after-tax dollars in with taxable dollars on gains out): (after-tax dollars with tax-free dollars out) • Non-deductible Traditional IRAS • Muni Bonds (in most cases) • Roth IRAS • 529 Plans • Non-qualified Annuities • Cash Value Life Insurance (when structured properly) TAX-FAVORED ACCOUNTS It's important to know how these accounts are taxed, especially since tax rates are at near historical lows these days. Yearly 1099s? Pay Taxes on Gains? Tax Deferred? Taxable Accounts Tax-Deferred Accounts Tax-Favored Accounts SHOULD YOU BE SPLITTING? Splitting your money into different accounts can give greater flexibility and choice. With this hypothetical example, look what would happen if, aged around 60, you took 10% of $100,000 out of a 401(k) account versus taking 50% of the money out of a 401(k) and 50% out of a tax-favored asset, such as a Whole Life insurance policy. 50% 401(k), 100% 401(k) Withdrawal 50% Whole Life Cash Value Withdrawal 401(k) 401(k) Whole Life Policy Cash Values $100,000 $50,000 $50,000 Money Withdrawn Money Withdrarwn Money Withdrawn $28,000 $14,000 Taxes Paid (28%) Taxes Paid (28%) Taxes Paid (28%) $72,000 $36,000 $50,000 Total Net Withdrawal Total Net Withdrawal Total Net Withdrawal Amount Amount Per Account Amount Per Account TOTAL MONEY KEPT $86,000 In this hypothetical example, if you chose the Whole Life Policy option you would have an additional $14,000 at retirement. Permission slips also give you greater flexibility. If you decide not to pull any money out of the policy, this gives you "permission" to spend down your other assets during retirement knowing you have life insurance to leave to your beneficiaries/heirs. DIVERSIFYING YOUR TAXES NOW CAN GIVE YOU A FINANCIALLY HEALTHY FUTURE. Plus life insurance offers some additional creditor protection that other assets may not (depending on your state of residence). SOURCES Guardian Life Insurance Company of America New York Times | Bloomberg | Forbes Huffington Post | Social Security Trust Fund | Organisation for Economic Co-operation and Development © 2014 The Guardian Life Insurance Company of America, New York, NY all rights reserved. TAX-DEFERRED %24

Tax Diversification

shared by amylstein on Aug 20
Infographic to demonstrate financial options for retirement planning.


Amy Stein


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