When it comes to retirement savings, all of us would love to have a silver bullet: A foolproof way to save and grow our money to meet all our needs and goals after we stop working.
Yet, despite what investment companies may tell you, there is no silver bullet for retirement savings. And that includes tax-deferred investment vehicles such as 401(k) plans and IRAs.
Let’s be clear, 401(k)s and IRAs are great investment vehicles in many cases, and the main reason is that they allow your money to grow tax-free. Investors in these tax-deferred vehicles will eventually have to pay taxes on their contributions and earnings, of course.
But in the meantime, they can effectively earn a return on their tax money. That can allow their account to grow much larger than it would have otherwise.
What the investment industry won’t tell you, however, is that this tax-deferral benefit may only work in your favor up to a certain point. The older you are and the larger your account, the more likely it is that continuing with a tax-deferred investment will have unintended tax consequences.
Many investors don’t find this out until age 70½, when they are required to start taking minimum distributions from their accounts. Distributions are considered ordinary income, meaning they can affect your tax bracket. And the larger the account, the more you are required to withdraw each year. Making matters worse, required minimum distributions often become greater over the years, creating yet more tax-bracket pressure.
As a result, too many investors have found themselves paying far more in taxes than they ever anticipated, just when they were supposed to be enjoying retirement.
Savvy investors always have an eye on potential tax consequences and they often choose to head off future problems by spreading their assets across multiple retirement solutions. One approach that works well for many of our clients is to invest part of their savings in customized permanent life insurance.
These cash-value policies grow tax-free (on after-tax contributions) and come with guarantees that prevent principal loss and sustain stable growth. Supplementing tax-deferred vehicles with custom-designed life insurance policies not only helps you to avoid the tax trap described above, but can ensure you will have a guaranteed stream of income for your retirement as well as, of course, a death benefit.
Permanent life insurance is such a versatile financial tool, in fact, that a number of our clients use it as the centerpiece of their overall financial strategy. Properly customized, it can help to create independence from conventional lenders and help you to achieve financial independence. If you’d like to learn more about this solution, simply contact us and request a consultation.
There’s no question that tax-deferred investment accounts can be an important tool in your retirement-savings toolbox, but it often takes more than one tool to get a job done well.