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Tax Diversifying Your Retirement Income


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While most people think of permanent life insurance as a way to protect the financial security of their families, it can also serve as a powerful retirement tool.

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Tax Diversifying Your Retirement Income

  1. 1. Tax Diversifying Your Retirement Income This presentation includes a discussion of one or more tax-related topics. This tax-related discussion was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRA penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. Please understand that New York Life Insurance Company, its affiliates and subsidiaries, and agents and employees of any thereof, may not provide legal or tax advice to you. 00386186CV Exp. 12/2010
  2. 2. Retirement Isn’t What It Used to Be <ul><li>Once: </li></ul><ul><li>Retirement typically lasted about 10 years </li></ul><ul><li>Social Security, defined benefit pensions and some personal savings covered basic expenses </li></ul><ul><li>Now: </li></ul><ul><li>Retirement can last longer </li></ul><ul><li>Many key sources of income have been reduced </li></ul><ul><li>Increased reliance on personal assets </li></ul>Social Security Pension & Qualified Plans Personal Assets Social Security Pension & Qualified Plans Personal Assets
  3. 3. Social Security Is Shaky <ul><ul><li>Social Security was never intended to be the only source of income for retirement </li></ul></ul><ul><ul><li>The maximum Social Security Benefit in 2008 for a worker retiring at full retirement age was $2,185 per month 1 </li></ul></ul><ul><ul><li>There are limits on how much you can earn before your Social Security benefits are reduced and/or taxed </li></ul></ul>1 Fast Facts & Figures about Social Security, 2008, SSA Publication No. 13-11785, Released: August 2008; page 2 Without changes, by 2041 the Social Security Trust Fund will be exhausted* and there will be enough money to pay only about 75 cents for each dollar of scheduled benefits. * These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to the Congress. “ ”
  4. 4. Fewer Pensions, Limits on Qualified Plans <ul><li>Only 22% of today’s workforce has access to a defined benefit pension plan 1 </li></ul><ul><li>Fewer employer contributions to pension plans; limits on company matching of 401(k) plans 1 </li></ul><ul><li>More reliance on employee contributions </li></ul><ul><li>Limitations on contributions </li></ul>1 ‘ Trends in Retirement Plan Coverage Over the Last Decade,” Monthly Labor Review , Stephanie Costo, February 2006. Pensions & Qualified Plans
  5. 5. Personal Assets Are Critical <ul><li>Most people have more questions than answers when it comes to planning for retirement </li></ul><ul><ul><li>How much will I need? </li></ul></ul><ul><ul><li>How much will I have? </li></ul></ul><ul><ul><li>How much do I need to save to cover the shortfall? </li></ul></ul><ul><li>For personal savings, the questions are: </li></ul><ul><ul><li>Where should I put my money? </li></ul></ul><ul><ul><li>How will I be affected by taxes? </li></ul></ul>Personal Assets
  6. 6. Tax-Perfect Retirement Planning <ul><li>The “tax-perfect” retirement plan would include: </li></ul><ul><ul><li>Contributions that are tax deductible </li></ul></ul><ul><ul><li>Accumulation that is tax deferred </li></ul></ul><ul><ul><li>Distributions that are tax free </li></ul></ul><ul><li>Such a plan does not exist, but you can have any two of these tax benefits </li></ul>
  7. 7. Where Do You Think Taxes Are Going? <ul><li>Tax rates are currently at historically low levels, suggesting they may be higher when you retire </li></ul><ul><li>Tax-diversifying your retirement savings might be sensible </li></ul>The graph above illustrates the high and low marginal tax rates over history. Exemptions, deductions and state and local taxes are not taken into account when illustrating these marginal tax rates. Your actual tax rates may vary from those show on the graph. Remember that historical rates are not a guarantee of future rates. Source: U.S. Department of Treasury, Internal Revenue Service, Statistics of Income, Historical income Tax Returns (2008)
  8. 8. Is Tax Deferral the Best Strategy? <ul><li>30 years ago, tax rates were so high and there were so many tax brackets, deferring income generally reduced the tax burden </li></ul><ul><li>In the new tax reality, the tax leverage benefits of deferring may not exist </li></ul><ul><li>Lower tax rates and fewer tax brackets today call for a smarter strategy </li></ul>1979-1980 2009
  9. 9. Your Retirement Savings Tax Options Roth IRA Tax-free municipal bonds Cash value life insurance Traditional IRA 401(k) Pension plans Profit-sharing plans Keogh Financial Vehicles After tax Tax deferred Tax free Tax deductible Tax deferred Taxable <ul><li>Tax Treatment </li></ul><ul><li>Contributions </li></ul><ul><li>Accumulation </li></ul><ul><li>Distributions </li></ul>
  10. 10. A Non-Traditional Solution 1 The cash value in a life insurance policy is accessed through policy loans, which accrue interest at the current rate, and cash withdrawals. Loans and withdrawals will decrease the total death benefit and total cash value. Life Insurance <ul><li>In addition to protecting your family, cash value life insurance can provide an ideal way to tax-diversify your retirement savings </li></ul><ul><ul><li>Premiums are paid with after-tax dollars </li></ul></ul><ul><ul><li>Generates cash value that generally accumulates on a tax-deferred basis </li></ul></ul><ul><ul><li>Allows you access to policy values – before or during retirement – generally on a tax-free basis 1 </li></ul></ul><ul><li>Upon your death, when many other investments are taxed, your beneficiaries also receive the death benefit income tax free </li></ul>
  11. 11. A “Self- Completing” Plan! <ul><li>If you live… </li></ul><ul><ul><li>You enjoy all the “living benefits” of life insurance, including the potential for supplemental tax-free retirement income </li></ul></ul><ul><li>If you become disabled… </li></ul><ul><ul><li>With the purchase of the Disability Waiver of Premium Rider, your premiums are waived, and all the benefits of your policy stay in force 1 </li></ul></ul><ul><li>If you die… </li></ul><ul><ul><li>Your family receives the full value of the policy, less any unpaid loans and loan interest, income tax free </li></ul></ul>1 Available on whole life policies Social Security Pension & Qualified Plans Personal Assets
  12. 12. The Benefits of Tax Diversification Retirement Income of $90,000 Without Tax Diversification $90,000 401(k)/Qualified Plans 100% taxable $90,000 taxed at 25% 1 = $22,500 tax Tax Diversification Strategy $90,000 $45,000 401(k)/Qualified Plans 100% taxable $45,000 taxed at 15% 1 = $6,750 tax $45,000 . Cash Value Life Ins. tax free 2 $45,000 taxed at 0% 2 = $0 tax 1 Marginal federal income tax bracket under current rates. 2 If structured properly. $67,500 to spend after taxes $83,250 to spend after taxes