With our current fiscal debt crisis, which is now over $73 trillion when you count Social Security and Medicare, tax rates will rise and benefits for seniors will be decreased in the future. You may have thought the deficit was only about $16 trillion. However, accounting standards require corporations and state governments to count new financial obligations, even if the payments will be made later. The federal government doesn’t follow that rule. Instead of counting lifetime benefits for programs such as Social Security and Medicare, the government counts the costs of benefits for the current year.
Many of my clients are shocked to realize that up to 85% of Social Security benefits are taxed. Also, if they take out more from their traditional IRA, more of their Social Security benefits are taxed—almost like double taxation.
We try to position our clients and their children to have both non-taxable and taxable accounts in retirement. We diversify taxable and non-taxable accounts just like a person diversifies investments within a portfolio. It makes a lot of sense for your financial adviser and your CPA to talk to each other to help streamline your finances. I don’t see this happening very often. I am both a CFP® and CPA.
Where can you get non-taxable income in retirement?
1. Roth IRAs
2. Life Insurance
3. Municipal Bonds
Roth IRAs are great, but a lot of my clients don’t qualify for one. You do have the option to convert traditional IRA funds to a Roth IRA, but it has to make sense for you. Also, you have limits on what you can contribute to a Roth IRA each year.
Life insurance is my favorite option. In fact my favorite life insurance product is called Indexed Universal Life Insurance. Indexed Universal Life is an amazing product with incredible features and benefits. Let’s look at 15 major features of Indexed Universal Life Insurance.
1. Death benefit as all life insurance policies offer.
2. Cash accumulation
3. Protection against market loss
4. Annual Reset Provision, index locks in gains and resets the index when a loss occurs in the index (best of both worlds)
5. Upside growth potential. Your account can experience the potential for decent growth.
6. Tax-deferred growth
7. Tax-free access to cash accumulation
8. No minimum age or income requirement
9. No mandatory distribution
10. Access at any age
11. Protection from lawsuits (in many states)
12. Continued investment if disabled
13. Does not create taxation of Social Security benefits
14. Avoids probate
15. Accurate return figures
Municipal Bonds are becoming more and more risky due to the fiscal problems of many jurisdictions. Yes, they are exempt from federal and some state income tax, but they can trigger more taxation of your Social Security Benefits.
As you can see, I am very concerned about future taxes and their effects on my clients’ ability to have a comfortable retirement. By having both taxable and non-taxable accounts in retirement you can have a much more manageable retirement. Every family’s retirement goals are different, and I customize each retirement plan to reach those goals.
Robert J. Fordham is President of Fordham Financial Services, Inc., a financial planning and tax practice firm in Lilburn, Georgia. Robert has holds both a CPA and CFP® License. Robert can be reached at (770) 736-6854.