It’s always important to diversify and spread your risk among many investments. Diversification can help protect you from fluctuations among different assets and asset classes.1 But, what about diversifying your tax rate exposure? By diversifying among different financial products you may have the ability to protect yourself against fluctuations in tax rates.
Why is this important? During years with high tax rates you may want to have the option to take funds from tax-free investments. In today’s uncertain tax and budget environment, planning for this is all the more important.
Rosie and Bennett are a middle-aged couple. They’re saving for retirement, but need to care for their children and plan for college. Bennett is also looking at life insurance to help protect the family in case something happens to him. At the same time, the couple is funding their IRAs and 401(k)s, but know these won’t address all they need for retirement.
A Possible Solution
Carl, their Financial Professional, shows them an option — cash value life insurance.
It offers Rosie and Bennett:
• Death benefit protection in case something happens to Bennett during his working years.
• Access to policy available cash surrender values that grow tax-deferred.
• During the couple’s retirement years, any available cash surrender value can be taken from the life insurance policy via withdrawals and loans. So long as the life insurance remains in force, the funds can be received income-tax-free.
• The couple can use these tax-free withdrawals and loans to supplement income in years they need added income without increasing their tax bracket.2
• Withdrawals and loans from life insurance policies are exempt from the 3.8% Medicare surcharge.
There’s a final added benefit:
Life insurance cash values, along with the couple’s IRA and 401(k) accounts aren’t included in the expected family contribution calculations for college financial aid.
This strategy works best if you:
• Need life insurance
• Think taxes will increase
• Need more retirement income than Social Security, their IRAs and other current savings can provide
• Already maximum fund their 401(k)s and IRAs1 Diversification is a method of asset allocation.
It does not guarantee a profit or protect against a loss. A diversified method of investing may result in a loss of principal to the investor. 2 Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, terminates, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.