Tax-Advantaged is Better than Tax-Deferred! Do you know the difference?

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Jim Lorenzen, CFP®, AIF®

Tax-deferred and tax-advantaged are two terms often used interchangeably and, as a result, often lead to a lot of confusion; but, the difference can be significant in planning how you will be drawing income from your nest-egg during your retirement years.  The key, of course, is to discover your options and do advance planning.

Many employers match employee contributions up to a certain dollar amount to a company-sponsored retirement account, which usually offers tax-deferred growth.  Contributing to your account up to the employer match is a significant first step to retirement success.

However, many have found that their company-sponsored plan has proven inadequate due to contribution limits and other factors.  Most investors would likely be well served seeking out other sources of tax-advantaged retirement funds.  When used properly, tax-advantaged money is taxed up-front when earned, but not when withdrawn.  This approach may seem costly; but, that view may very well be short-sighted and far more costly.[i]

Let’s take a look at a hypothetical example of tax-deferred and tax-advantaged money at work.  Our fictitious couple, Mitch and Laura, are starting retirement this year and will need $50,000 in addition to their Social Security benefits.  Assuming a 28% state and federal tax rate, they’ll actually need to draw $69,444 from their retirement account to meet their needs.[ii]

Tax Deferred

Need = $50,000

Taxes = $19.444

Total Withdrawal required to meet spending need: $69,444

What if Mitch and Laura had balanced their portfolio with a tax-advantaged funding source?  What if they could pull the first $30,000 from the tax-advantaged source and the rest ($27,777) from the tax-deferred source?  What would that look like?

its-about-timeTax Deferred Combined with Tax Advantaged

Tax-Advantaged money = $30,000

Tax-Deferred money = $20,000

Taxes = $7,777

Total Withdrawal to meet needs and taxes = $57,777

Because Mitch and Laura balanced their portfolio, they saved $11,667 each year during retirement – almost 24% of their year’s living expenses each year!   Simple math reveals a savings of over $116,000 during ten years of retirement; and it they’re retired for 30 years, as many are, the savings is over $350,000, not counting what they could have made by leaving the money invested – which could be rather substantial:  At just 3.5% annualized, the total would come to over $600,000!

A Plan that Self-Completes

Most savings plans, including employer-sponsored retirement plans, are dependent upon someone actually continuing to work and actively contributing to the plan.   If work and contributions stop, the plan does not complete itself.    

It’s been my experience that relatively few individual investors have self-completing retirement plans, while a rather large percentage of high net-worth investors do.

What financial tool can accomplish the goal of being self-completing?  Not stocks, bonds, mutual funds, or even government-backed securities of any type.   There’s only ONE I know of – and, it’s tax-advantaged, too.   Believe it or not, it’s a “Swiss Army Knife” financial tool called life insurance.    It’s not your father’s life insurance; it’s specially designed

It can ‘self-complete’ a retirement plan – and it doesn’t matter if the individual dies early or lives a long life.  Few people realize they can win either way.    As I said, stocks, bonds, real estate, commodities, and company retirement accounts simply can’t match it; but, the design must be customized.

If you’d like to learn more about this and other smart retirement strategies, feel free to contact me.

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[i] Retirement guru Ed Slott, also a practicing CPA, is one who believes it’s very likely far more profitable to pay tax on the ‘seed’ money than on the ‘harvest.  I have created a report entitled, “How To Plan For an Income Tax-Free Retirement”.  You can request a copy at http://www.indfin.com/taxfreeretirementreport.

[ii] This has always been a source of misunderstanding for many individual investors:  The fact is not all the money in Mitch and Laura’s retirement account belongs to them.  Their retirement account might show a $500,000 balance, for example, leading them to believe they have $500,000.  The truth is less comforting.  The truth is, given a 28% tax-bracket, that $140,000 of that money belongs to the government, not Mitch and Laura.  They’ll likely never see it.  Their real balance – the one the statement doesn’t show them – is $360,000; and, as we’ve seen, they’ll need to draw-down $69,444 each year to meet their needs.  How long do you think that money will last?

 

 

Disclosures

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Caring for a Loved One at Home? Here are some tips!

Sunday Brunch at home.

Sunday Brunch at home.

Jim Lorenzen, CFP®, AIF®

Taking care of family does present its challenges; but, it can extremely rewarding – and a lot of fun!

If you’re one of those who’s embarking on this journey, there are a lot of resources available to you; but, there’s also a lot you’ll want to know.

My wife and I cared for my mom for nine years, and we’re now caring for her mom.  As I said, there are challenges, but it can be a time you’ll never, or want to, forget.

The button below will get you to some tips you might find helpful, as well as some personal experiences that you may find worth knowing.

Enjoy!
Home Care Resources and Tips You Can Use!

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

TO ROLL? OR, NOT TO ROLL….

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Jim Lorenzen, CFP®, AIF®

Getting ready to pull the retirement cord?  In a previous post, I had talked about pension options – worth reviewing if that’s an issue for you.  I also recently provided an IRA rollover checklist  for those evaluating the pros and cons of such a decision.

Whether or not to to do a rollover is not a simple ‘yes’ or ‘no’ question.  It depends on your particular situation.  There are good reasons both for and against rolling over your retirement plan to an IRA – the checklist can help sort those out.

Believe it or not, there may be a reason to take some of your retirement out in cash and pay taxes right now!  How can that be?

If you’re on of those now doing your homework – good for you – you may enjoy reading this report, Six Best and Worst IRA Rollover Decisions.  This report not only discusses those decisions, it will also provide some insight on additional issues worth considering.

I hope you find it worthwhile.  You can download it here>  Click here for your report!

Before you get to the report, however, here’s a bit of news I came across from Mark Dreschler, the president and founder of Premier Trust.  His words:

The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’  bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.

However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.”  The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds, but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.

Hope you find that helpful.  And, don’t forget to download your report.

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

 

Thinking of Rolling your 401(k)? This checklist may help!

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Jim Lorenzen, CFP®, AIF®

Getting ready to leave your company?  Considering doing a rollover?  This isn’t a decision to be taken lightly.  While rolling over your 401(k) or other qualified retirement plan to an IRA makes perfect sense for many people, it’s not an “automatic” decision.

I’ve put together a little checklist that may provide some help.  I hope you feel it’s helpful for you.

Jim

Click Here for your checklist!

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients’ wealth management needs since 1991.   Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing retirement planning and investment advisory services on a fee-only basis.   He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriately licensed professional.  All images used in this communication are in  public domain unless otherwise noted.

17 Unexpected Retirement Expenses

checkbook-penJim Lorenzen, CFP®, AIF®

The Society of Actuaries outlined 17 unexpected or shocking expenses during retirement in its 2015 Risks and Process of Retirement Survey.  I’ve put those into a small report that explains why two in particular happen to too many retirees.

I hope you enjoy it.  You can get yours by simply clicking on the button below.
Click Here for your report

 

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® providing private client wealth management services since 1991.

The Independent Financial Group is a registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659.

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

Investment Return Figures Can Take Many Forms

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Jim Lorenzen, CFP®, AIF®

Many years ago a prospective client told me his investment returns had averaged 25% per year over the past ten years.  This was back in the ’90s when the markets were going strong and everyone (it seems) was watching ‘talking heads’ give their ratings of mutual funds on the various tv business channels.

He was sure he was earning 25% per year because his $100,000 had grown to $250,000, a 250% increase he said.  And, as everyone knows, 250% divided by 10 years is 25% per year.

I didn’t bother asking him if he’d also been adding deposits to his account during that ten year period, in which case dollar-weighted returns would be different from time-weighted returns.  But, even without additions, his real return was more like 9.6% – not bad (remember, it was a bull market), but a far cry from 25%.

But, that 9.6% was his compound return – and that’s different from his average return.

If you’d like to learn more about deciphering investment returns, you may enjoy this special report.  You can access it by clicking the button below.

Enjoy!
Special Report: Understanding Investment Returns