This webinar, "Tax-Efficient Investing: Comparing The Results" was the second of a four-part series with Advisors4Advisors.com on tax-efficient Investing. You can view the on-demand webinar replay and receive CFP and IMCA CE credit at http://bit.ly/taxefficient2
Tax Aware Investing -It’s the after Tax Return that Counts! Advisors4Advisors Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us. Presented by: Robert S. Keebler, CPA, MST, AEP (Distinguished) Stephen J. Bigge CPA, CSEP Peter J. Melcher JD, LL.M, MBA Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI 54301 Phone: (920) 593-1701 [email protected]
Transcript
Tax Aware Investing-It’s the after Tax Return that Counts!
Advisors4Advisors
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.
Presented by:
Robert S. Keebler, CPA, MST, AEP (Distinguished)Stephen J. Bigge CPA, CSEP
Peter J. Melcher JD, LL.M, MBAKeebler & Associates, LLP
COMMENT: Tax-deferred growth over time allows for more wealth to accumulate. However, without any income tax deduction and lower capital gains tax rates, the tax-deferred annuity barely breaks even with a taxable investment.
Tax-Deferred Annuity vs. Taxable Investment Account (Stock Portfolio
Tax Aware Investing Observations- What have We learned?
• Life Insurance is an Extremely Efficient “Tax Asset Class” for Bond Type Investments
• Tax-deferred Annuities are more Efficient then Bond Type Investments
• Passive Low-turnover Investments provide a Higher After-tax Return on Investment than more Active Strategies generating Short-term or Long-term Capital Gains
• The Real Capital Gains Rate on a Present Value Basis is Substantially less than the 15% Statutory Rate
Understanding the Tax-Law
• Deductions upon Funding• Recovery of Basis• Taxation upon Withdrawal
• Financial Vehicles– Traditional IRA, Roth IRA– 401 (k) or pension plans, tax-free municipal bonds– Profit sharing plans, cash value life insurance– Keogh
$ D % D $ D % D $ D % D $ D % D15% Tax Rate @ Contribution -$ 0.00% 131,649$ 10.74% 263,298$ 22.13% 394,947$ 34.25%25% Tax Rate @ Contribution (131,649)$ -10.43% -$ 0.00% 131,649$ 11.07% 263,298$ 22.83%35% Tax Rate @ Contribution (263,298)$ -20.86% (131,649)$ -10.74% -$ 0.00% 131,649$ 11.42%45% Tax Rate @ Contribution (394,947)$ -31.29% (263,298)$ -21.48% (131,649)$ -11.07% -$ 0.00%
15% Tax Rate @ Distribution
25% Tax Rate @ Distribution
35% Tax Rate @ Distribution
45% Tax Rate @ Distribution
AssumptionsCurrent age of IRA owner: 35Age of IRA @ retirement: 65Annual IRA contribution (Age 35 – 49): $5,000Annual IRA contribution (Age 50 – 65): $6,000Pre-tax growth rate (IRA): 6%After- tax growth rate: 5%% of after-tax IRA distributions reinvested: 100%
Total Retirement Funds @ Death (i.e. Age 84)
Client accesses $150,000 from her 401(k)Client accesses $75,000 from her 401(k)
and $65,000 from her cash value life insurance policy and/or Roth IRA
Without Tax Diversification
The full $150,000 is taxable at an average tax rate of 30% or $45,000
Only the $65,000 from her 401(k) is taxable, and it’s taxed at the lower average tax rate
• Low Turn-Over Gain Strategies• Qualified Dividend • Long-Term Capital Gain Strategies• Real estate Investments• Oil and Gas Investments• I Bonds• Tax-Exempt Bonds• Master Limited Partnership
• Consider the tax structure of the account as you allocate assets– Income producing assets in traditional IRA– Capital gains assets (especially those you intend to hold for a long
period) in a taxable account– Roth IRA Rapid Growth
$250,000$250,000 IRA$500,000
Taxable Account$500,000$250,000 $250,000
Bonds StockThe illustration is NOT intended to be a recommendation, but to provoke thought. As you know, asset allocation should be determined according to risk tolerance and time horizon. Tax sensitivity would be considered secondarily.
Tax-Sensitive Account Allocation• Orange = position the investor would be at under the original 50% stock / 50% bond
investment mix • Blue = additional $63,890 of additional growth the investor would achieve by placing 100% bonds
in IRA• Assumptions: Bonds and the stock both generate a 7% return on a pre-tax basis. The stock earnings
are deferred until the time of sale, then taxed as long-term capital gains. The amount of any tax savings from a deductible IRA contribution is invested in a taxable investment account earning the same yield as the IRA. The values shown for the IRA include the value of the taxable investment account. The client is in the 25% ordinary income tax bracket (15%* for capital gains purposes)
1,800,000
2,050,000
2,300,000
2,550,000
2,800,000
10 11 12 13 14 15
Option A - 100% Bonds in IRA
Option B - 50/50 Mix in IRA
$63,890 of additional assets (2.6% increase)
* The 15% long-term capital gain rate is only effective under current law through 2010. It is not certain that the Congress will extend the15% rate.
Integrating Account Tax Structure with Asset Allocation
(100% Bonds in IRA vs. 50/50 Mix of Stock and Bonds in IRA)
Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.
For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.
