InsuranceNewsNet Magazine February 2012 : 39
ARE yOuR CLIEnTs TAx DIvERsIFIED? | AnnuITIEs There is one question to ask the achieved above will be lost since Roth when added to the additional ordinary and capital gains taxes that will be due, Spencers: Why are you paying taxes contributions occur on an after tax Greg and Nancy liken this to a reduction on money today you are not using? This basis. Finally, the Spencer’s could pur-is the question the Spencers should be chase life insurance however they are in their annual rate of return. The Spencers are always looking for asked regarding each line of income on already adequately insured. ways to reduce their tax liability, but their tax return. This leaves the Spencers with the abil-After establishing that the Spen-ity and desire to invest in the tax later they do not want to reduce their cur-rent income or spending. Furthermore, cers do not have a current need for category. This category includes qual-they want to have as much money set this $10,000, our goal becomes one ified retirement plans and non-qual-aside for retirement as possible. Initially of removing it from the tax return. ified annuities. Having already made they work with their financial advisor to As long as the Spencers wait until the the maximum contribution to any IRA determine their current and retirement CD had matured, there are no conse-and 401(k) accounts, one suggestion is income needs. The advisor they chose quences to removing these dollars from to take the money from the CD upon has a history of working with retirees the CD and investing them elsewhere. maturity and purchase a deferred annu-and is licensed to sell both insurance One suggestion would be to invest in ity. While in the accumulation or tax and securities products. This exercise a taxed later or taxed preferred envi-deferred stage there will not be a current shows they can maintain their current ronment. Tax preferred investments tax implication to this investment. The lifestyle with less income. Their advi-are the most desirable as there is the result is that the $10,000 being gener-sor suggests they increase their pre-tax potential for these dollars to escape ated by the CD will no longer be an item contributions to their employer on the tax form. Keep in mind, sponsored retirement accounts. once distributions from the annu-By doing this, their wages remain ity begin, all or a portion of the the same; however the taxable payments will be taxed. Follow-income is reduced because tra-ing this re-investment, the total ditional retirement plan con-Medicare surtax will be $1,140, tributions occur on a pre-tax for a 40 percent reduction in the basis. After increasing their pre-surtax due. While similar oppor-tax contributions to their retire-tunities exist in reference to the ment accounts, their income from reallocation of other investments, wages is $240,000 and their sur-there could be tax consequences Taxation Expenditure tax is reduced to $1,520. surrounding their reinvestment. At this point their advisor edu-This income audit and the rein-Tax Now Retirement cates the Spencers on the bene-vestment of assets that follows fits of incorporating tax diversi-positions the client in a “win-win” fication into their planning while position, regardless of what tax Tax Later Mortgage conducting an income audit. An rates do in the future. If income income audit is where incoming tax rates decrease, this client is in Tax Preferred Legacy investment dollars are catego-a better position with these dol-rized into one of three catego-lars removed from their taxable ries, while the same is done with equation. Likewise, with these expenses. Our three income cat-dollars removed, the client is in egories are taxed now, taxed later and taxation entirely. These investments a better position if tax rates increase. tax-preferred. Meanwhile, they exam-include Roth accounts, municipal bonds And finally, even if tax rates remain the ine three common expenses, which are and life insurance. Today, the Spencer’s same, the Spencers’ overall tax situation the mortgage, retirement and those dol-income is too high to participate in a is improved. Until we can predict the lars designed for estate planning. The Roth IRA. They could consider mak-future of income tax rates, the next best income from the CD is an example of a ing a nondeductible contribution to an thing is to position a client so that they taxed now asset, but the Spencers hope IRA and then immediately converting will always be in the most advantageous to leave this money to their children if to a Roth IRA. While there are income position possible. they have not needed it during retire-limits on a Roth IRA contribution, the ment. While the Spencers pay taxes income limits on Roth conversions were Sonja Hayes is director of advanced planning and solutions at Prudential each year on the interest that is being eliminated as of 2010. This strategy Annuities. She can be reached at Sonja. generated from this CD, the money would enable them to fund $10,000 in Hayes@innfeedback.com. itself is not now being used. Instead it a Roth each year. If they contribute to a Roth 401(k), the income reduction we is rolled over into the next CD. “There is one question to ask: why are you paying taxes on money today you are not using?” February 2012 InsuranceNewsNet Magazine 39
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