If you missed part 1 of this 4 part series, you can view the retirement blog post can be found here >>.
The first is by putting as much money as you can in tax deferred places. The first opportunity is to sock away as much money as possible in your IRA, Roth IRA, 401(k), 403(b), 457, SIMPLE, Keogh and various places classified as retirement accounts. There are literally hundreds of “shelters, qualified accounts and safe havens” in the tax code because of special interests that were rewarded for political contributions and favors. You can shelter from current income taxes all or a sizeable portion of your income by using the special provisions of profit-sharing plans, deferred compensation plans and various other tax-friendly part of the tax code known only to well-versed financial advisor, tax attorneys and tax accountants. But, you’ll need to engage the services of one or more of these professionals to be assured it’s cost effective and legal. For most people, however, there is a far easier way to enjoy tax-deferral and at the same time get safety of principal. You need to know about fixed annuities.
Fixed annuities are issued by insurance companies. Many who can benefit refuse to entrust their money to an insurance company because they are afraid of losses. This is ironic because the same people have no problem in relying on an insurance company to protect their home, health, life, car, business and virtually everything else of value. Fixed annuities range from (a) the simple ones that pay you a set rate of interest that is changed at yearly or multi-year intervals to (b) more complex ones whose interest is linked to changes in a stock or bond market index. Also, you can purchase an annuity that pays you an annual income for life or you can select a combination annuity that is designed to produce annual earnings but be changed into a lifetime income if needed. Don’t confuse a “fixed annuity” with a “variable annuity” because the variable version has substantial market risk and could result in sizeable losses of your principal. Fixed annuities are guaranteed by the insurance company to never have a loss if held for the full contract term, generally ranging from three years to as many as fifteen years.
All annuities have one thing in common: tax deferral. This means that you will pay no income taxes on earnings until you actually withdrawn them. So if you have ample money for retirement, it makes a great deal of sense to put your “to be used later in retirement” money into an annuity to postpone the payment of income taxes. This means you’ll earn interest on your principal, interest on the interest you did not withdraw and interest on the money you would have paid in taxes. This “triple compounding” will boost the growth of your money and you’ll have more in the longer term. Speaking of longer term, annuities work best in the long term and are not appropriate for money you’ll need early in retirement.
Another benefit of fixed annuities is that the interest you earn is not reported as taxable income and this means that taxes on your Social Security benefits could be lower. Another benefit is that there are no mandatory withdrawal requirements so the tax deferral can work for the remainder of your years. At the end, your money will pass to your named beneficiary without having to go through the delay and expense of probate. Of course, your heirs will have to pay taxes on the tax-deferred earning you leave them. But, you can mandate how the money is paid out to them – in a lump sum or over a period of years. If the money happens to be qualified money from an IRA, 401(k) or other retirement account, you can “stretch” the payments over the lifetime of the beneficiary. If you would like to know more about how annuities work and whether or not they can help solve your tax problems, help is as close as your financial advisor. If you are not using the help of a professional financial advisor, please reconsider because they are needed just a much as a medical, tax, legal or spiritual advisors.
Shelby J. Smith, Ph.D.
Related Resource: You, Taxes and Retirement (Video Seminar 10 minutes)
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Stay tuned for Part 3:Tax Savings Benefits of Roth IRAs – How to Getting Social Security Right and Part 4: Life Insurance is the Ultimate Tax Dodge.
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