Many professionals sign up for their company’s 401K plan without giving it too much thought – and you may have done the same. But being financially savvy includes considering the long-term tax consequences of the actions you take today – Or what they will cost you tomorrow.
Tax Deferment Truth
Some of the most knowledgeable people are often unaware of just how much of an effect deferring taxes has on their wallet in the long term. Especially in light of huge government deficits and the certainity that tax rates will increase, a person’s tax situation is likely to be quite different around the time they are ready to retire.
Position is Power
Of course, properly positioning your money so that it provides you with tax efficient income is vital. Through life insurance, you can often secure a powerful position with benefits that your 401K won’t be able to offer.
Erroneously thought of as something that’s only designed to cover your loved ones financial needs when you pass on, life insurance provides an investment alternative whose returns can come back to you on a tax free basis at retirement. And many times it will actually exceed what you’d receive, after taxes, from your traditional 401K plan.
You Life Insurance Policy Isn’t in Kansas Anymore
Thanks to changes in the annuity industry since the mid-1990s, flexible premiums are now able to provide investors with the opportunity to increase the cash side of their policies without substantially increasing their death benefits and policy costs. These new policies provide the security of guaranteed cash values and interest that is linked to a stock market index. (For more information, see Life Insurance Ain’t What it Used to be.)
The key for any professional who is investing in his future is to begin thinking longer term. Avoid the trap of thinking the traditional 401K is the only or best option. Strongly consider not tax deferring so much of your hard-earned money. For many savers, finding the balance between tax deferral and tax free is well worth considering.
And be sure to contact an experienced professional like Barber & Associates who can help you sort through all the complexities of these issues for you. For thirty-eight years, we’ve assisted people in designing tax efficient retirement plans using life insurance to supplement 401Ks.