How Tax-Deferred Accounts Can Help Increase Your Wealth
When it comes to financial planning there is no one-size-fits-all option. As individuals, we all have different goals and objectives based on things like kids, marriage, work, age, and a host of other variables. When sitting down with your tax and/or financial advisor, it’s important to understand your asset allocation and what types of tax-deferred accounts you may have. If there is no tax due on income earned in the account, the account is considered tax deferred.
What does that mean for you? It can be a powerful way to increase your retirement income. Tax deferral is an extensive topic and we would have to write a 100+ page blog to cover it all. For this blog, we’re going to hit on three points that we frequently see within our client base at North Main Financial. Staying true to form, here is our three-point sermon with regards to tax deferrals.
Retirement accounts or retirement savings.
Generally speaking when you invest in an employer-sponsored retirement account such as a 401K, 403B, SIMPLE IRA, or SEP IRA, you might have the opportunity to tax defer some gains you have inside those accounts until you use them or need them at some point in the future. The same can be said if you are investing on your own into a Traditional or ROTH Account. You may also get some tax benefit for the contribution you make into those accounts.
If, for example, you work for an employer and are investing into a Traditional 401K through your employer, you may receive some tax benefit for making deferrals from your paycheck into that 401K. In other words, you may be able to reduce your taxable income by contributing to the companies 401K or similar retirement plan vehicle. In addition to that, as those gains accumulate through the years, you may not necessarily be obligated to pay taxes on those gains in the year in which you enjoy them. So, if you’re not taking a withdraw out of your 401K account, or other similar type of retirement account, you’ll not be taxed on those gains until you must withdraw funds or choose to withdraw funds.
In short, there can be some tax advantages to participating in your company’s retirement plan. In addition to a company retirement plan, it is possible to get some tax advantages if you work for a company that doesn’t have a retirement plan or if you own your own business. You can tax defer some gains inside a Traditional IRA, a SEP IRA, or a SIMPLE IRA, and possibly get some tax benefit for the contributions that you make to that plan.
Annuities and life insurance.
When thinking about life insurance remember life insurance is intended to provide some death benefit for someone who has an insurable need relative to the policy which is held by the owner and on the insured. We’re not looking at life insurance as a pure investment vehicle, but we recognize that folks periodically use the cash value of life insurance to provide them some tax-advantaged income through loans. There are lots of moving parts here, so this is something you want to discuss with your tax or financial advisor.
While life insurance is life insurance, if you have cash value or permanent life insurance, there may be ways to use that cash value and the accumulation of it through the years in ways that are tax advantaged for you. If you are a business owner or are looking at key man or key person insurance or have a buy-sell agreement relative to a succession plan for your business, there are opportunities to use that cash value in tax advantageous ways.
Moving on to annuities. They are very complex structures in the numbers of bells and whistles that go along with them. If you have an annuity, make sure you understand how the expenses go together and how the investments which may be inside of them go together. If it’s a fixed contract understand how interest is accumulated inside the contract.
Non-qualified annuities, which are not under a retirement or IRA umbrella, present even more possibilities. If you are putting non-qualified or non-retirement monies inside an annuity contract you may be able to, not always, tax defer any gains you have inside that contract until you withdraw the funds.
There are a lot of expense structures, investment possibilities, and variables in annuities. Know the details of your annuities like charges, what happens if you withdraw funds, age restrictions relative to being penalized on any gains, how you can take annuity in the future, I could go on. The opportunity is there to tax defer some of the gains until a notable point in the future, but it is complex. Let your tax and/or financial advisor help guide you through the hundreds of variables when it comes to annuity contracts.
Deductions, capital expenditures, and exchanges of real estate.
If you are in business for yourself or a real estate investor, you have probably looked at some of the things listed here. Exchanges of real estate are also called a 1031 exchange which has to do with tax-deferring capital gains on investment real estate or commercial real estate. Under a 1031 exchange you can tax defer capital gains to some undefined point in the future so long as you invest the proceeds from a previous real estate holding into a subsequent real estate holding.
Basic business expenses that do not have a long-term value can include deductions. Items such as company-vehicle maintenance, employee retirement plans, and business-related travel would all fall into this category. There are also capital expenditures which is a term the IRS uses. Capital expenditures refers to the purchase of a fixed asset, or a long-term investment if you will. Items such as buildings, equipment and vehicles fall under this category. As always, it’s a good idea to work with your tax accountant or financial advisor to see where tax advantages may lie for your specific situation.
Tax-deferred accounts can carry many advantages for you and your financial planning and tax-free growth is a primary advantage. That is, the ability to pay taxes at a future date on current returns of investment, allowing the investment to grow without current tax implications. Sit down with your tax accountant and/or financial advisor and look at all your retirement accounts to see if there are some tax-deferral opportunities there. It’s also a good idea to review your life insurance policy at the same time to make sure you understand if there are any occasions to take advantage of. Lastly, if you are in business for yourself, or investing in real estate, there are plenty of opportunities to tax-defer, let your financial team help you navigate these waters.
Interested in hearing more about this topic? You can listen to the full episode of the North Main Financial radio show on WSIC by clicking here: Tax Deferral (7/6/19)
If you have questions about your financial goals or would like to talk with us further about our services, give us a call at (704) 987-1425 or visit us at www.northmainfinancial.com. If you wish to schedule an introductory meeting, we would be happy to meet with you at no cost or obligation to you.
These Blogs are provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of SagePoint Financial.