Author Box
Articles Categories
All Categories
Articles Resources

Income Planning For Rising Taxes

June 29, 2012 | Comments: 0 | Views: 170

The Bush Tax cuts are set to expire in January of 2013, which will prove to be a major problem for many investors. This is especially true considering we have spent more money as a nation over the last 4 years than any other time in US history, bringing the debt toll to over $4.5 trillion since 2008. This drastic spike in spending is likely to be followed by a steady increase in Federal income taxes. It's not a question of if, only a question of when.

Since 1913 the average marginal tax rate has exceeded 60%, and today our Federal income tax bracket caps out at 35%. Considering we are at almost half the average Federal tax rate today, what do you think is likely to happen with Federal income taxes moving forward? It doesn't take a rocket scientist to figure out that the only way to offset our federal deficit is to decrease spending and raise taxes. Moving forward, especially with the excessive Federal stimulus, I am of the opinion that decreased spending is going to be more of a dream than a reality.

Do you have a contingency plan in order to offset rising taxes? Most Americans are unprepared to deal with a decrease of net spendable dollars due to inflation and rising taxes coming around the corner. Today, most retirement plans are 100% taxable upon withdrawal and cannot be withdrawn prior to 59 ½ years old without a penalty. These are pretax dollar funds that are usually accumulated through an IRA, 401k, or equivalent deferred compensation vehicle. Although these vehicles grow tax deferred, they are subject to ordinary income taxes upon withdrawal. Not to mention after 70 ½ years of age the IRS makes it mandatory that every citizen who owns a pretax dollar account must withdrawal a certain percentage, known as required minimum distribution. The traditional way of financial planning taught investors to minimize their current tax bracket with the assumption they will be paying less taxes in retirement. With the amount of Federal stimulus we've had over the last 4 years, that reasoning is out the window. These are some of the reasons why many younger investors, and those preparing for retirement in the next 5-10 years, are looking to post-tax deferred compensation plans that can allow for withdrawals exempt from Federal income tax (if properly structured).

Life insurance products such as Indexed Universal Life (IUL) are being utilized as deferred compensation plans in order to offset rising federal income taxes, market volatility, and the threat of hyper inflation. Deposits into IUL policies are post tax dollar funds, meaning you have already paid Federal income tax on the money you deposit into these products. Funds within this policy grow tax deferred, and there is no restriction on what age you can withdrawal the funds out at. Furthermore, there is no restriction on the amount you can deposit annually; unlike an IRA. Since all IUL products are life insurance policies that come with an accelerated death benefit, the policy owner is able to withdrawal the funds exempt from Federal income taxes through a loan that they take against the death benefit (assuming the policy is structured as a non MEC from the start of the policy). Since the policy owner is taking a loan against themselves, interest on the loan is not deemed payable on an annual basis. The interest on the loan will accumulate at a low interest rate that is not due until the death of the contract owner (the policy owner has the option to pay off the interest at their discretion during their lifetime). At the time of death the total loan balance is subtracted from the death benefit and the remainder of the funds goes to the beneficiary tax free. So now we see how tax free income is possible, let's take a closer look at the true benefits of these products.

Policy owners in IUL products never lost a penny, even during the worst years of the recession, and have achieved moderate returns that have beaten any other fixed product available. IUL policies are able to do this through a concept known as annual reset and interest crediting methods known as indexing. Annual reset is a method that allows your cash value to reset each year regardless of how the market performs, while indexing allows you to accumulate interest based on the performance of an indexed fund, like the S & P 500. When the market goes south you will simply break even; or in some policies earn a small rate of return, also known as a floor rate. Conversely, when the market goes up you will receive a portion of the market upside; commonly referred to as a cap. Investors are willing to trade all of the upside of the market in exchange for a financial product that will never lose a penny to market volatility with capped earnings. I find it fitting to think of this as a batting average. The analogy being that investors in these products are not trying to hit a home run, but instead are focusing on hitting singles and doubles; thus increasing their batting average. The theory is, the more runners you get on base the greater chance you have to win the game.

As the financial crisis lingers on, IUL policies will be actively pursued by investors who are deemed insurable, or able to pass underwriting guidelines. Truth be known, many corporations are now implementing IUL into their business practices in order to protect liquid assets and key employees. This multibillion dollar industry could very well prove to be a multitrillion dollar industry over the next decade. These policies will soon start to replace pretax deferred compensation plans that are completely taxable upon withdrawal, not to mention have severe restrictions on both what age you can withdrawal the funds at without penalty and restrictions on how much you are able to deposit each and every year. Rest assured, investors that adopt income planning solutions to offset both future volatility and rising income taxes will be much more equipped to deal with an uncertain future.

Cal Burgess specializes in unique core concepts designed to eliminate all market volatility. These proven strategies have helped thousands of investors by serving as a contingency plan to their portfolio. Please visit http://www.AboutUniversalLife.com in order to learn more about these products.

Source: EzineArticles
Was this Helpful ?

 
0
 
0
 
Rate this Article
 vote(s)
Feedback
Print
Re-Publish

Article Tags:

Income Planning

,

Preparing For Rising Taxes

,

Indexed Universal Life

,

Deferred Compensation

,

Rising Taxes

Forex dealing is dealing in currency trading and basically includes dealing in foreign exchange while the stock market dealing is the dealing of stock in a standard market market. The two types of

By: Anil Mali l Investing > Stocks l October 25, 2012 lViews: 243

Investments in silver metal can be done by several ways. The article talks about the best ways of silver investments. Silver, the precious metal has always attracted investors for several reasons.

By: Kyles Humphrey l Investing > Gold Silver l August 17, 2012 lViews: 304

The article offers reasonable reasons for high oil prices. Crude is indispensable and it is a great source of energy. The prices on oil keep on altering, sometimes it is too high and sometimes it

By: Kyles Humphrey l Investing > Stocks l August 17, 2012 lViews: 285

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esget l Investing > Retirement Planning l July 17, 2012 lViews: 404

A few months ago, I was at Starbucks talking to someone about stocks and bonds, he and his wife had worked hard and were worried about the stock market. They wanted something much less risky. He

By: Lance Winslow l Investing > Stocks l July 11, 2012 lViews: 433

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

By: Lawrence Tepper l Investing > Retirement Planning l July 10, 2012 lViews: 240

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esgetl Investing > Retirement Planningl July 17, 2012 lViews: 404

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

By: Lawrence Tepperl Investing > Retirement Planningl July 10, 2012 lViews: 240

You Must Take Calculated Risks to Succeed. Financial Education is the Key. Promissory Note Investing Has 3 Types of Risk. Risk comes from not knowing what you are doing.

By: Lawrence Tepperl Investing > Retirement Planningl July 09, 2012 lViews: 177

Overseas retirement has been a very attractive means to start over for people who have spent more than half of their lives toiling day and night. This could be the very dream of the younger ones as

By: Kate Bryanl Investing > Retirement Planningl July 08, 2012 lViews: 187

All investing is an inexact, challenging activity. Investing is more like an art form than an actual science. Specialized investing, such as promissory note investing, is a relatively small and

By: Lawrence Tepperl Investing > Retirement Planningl July 07, 2012 lViews: 191

It's the epidemic of the unemployed younger working class that is a major threat to the financial longevity of our nation. Our future leaders are bitter, and with rightful cause. Without addressing

By: Cal J Burgessl Investing > Retirement Planningl July 03, 2012 lViews: 167

It's the epidemic of the unemployed younger working class that is a major threat to the financial longevity of our nation. Our future leaders are bitter, and with rightful cause. Without addressing

By: Cal J Burgessl Investing > Retirement Planningl July 03, 2012 lViews: 167

It is no secret that the traditional pension plan is pretty much unheard of in the private sector. Today, your only real hopes of receiving a pension are through a government job. Even at that, state

By: Cal J Burgessl Investing > Retirement Planningl June 21, 2012 lViews: 150

For many, the approach to retirement planning is in direct conflict to Maslow's hierarchy of needs. The approach to retirement is working counter intuitive to the traditional planning approach. For

By: Cal J Burgessl Investing > Retirement Planningl June 15, 2012 lViews: 150

When you take into consideration that Spain's economy is twice the size of Greece, Portugal, and Ireland combined, it's becomes clear why it is a serious concern for the EU. Spain's financial crisis

By: Cal J Burgessl Business > International Businessl June 11, 2012 lViews: 216

Discuss this Article

comments powered by Disqus