Only Two Things in Life are Certain: Death and Taxes

As the old saying goes, only two things in life are certain: Death and Taxes.  Regardless of your age, now is the time to educate yourself on options for managing both that apply to your situation.

Taxes

How can taxes be avoided in the future? Assets can be positioned to eliminate or diminish future taxes. Options for building tax-free assets include Roth IRA’s, 401(k)’s with a ROTH option, municipal bond portfolios and certain life insurance policies.

As an example of the impact of future taxes, suppose you decide to buy a car for $30,000 and withdraw the funds to pay for it from your traditional IRA or 401(k). Assuming that you are in the 25% income tax bracket, you will need to withdraw $40,000 in order to have enough funds to buy the $30,000 car and to pay the 25% tax that is due.

Withdraw $40,000

Car Purchase $30,000

25% Tax Due $10,000

If the funds were in a tax-free account, you would only need to withdraw $30,000 for the car purchase regardless of your tax bracket.  

Death

How should you prepare your finances for the end?

• Provide: Write a will that provides for your family and protects assets.
• Protect your family: Purchase insurance to settle your estate, replace income, and cover outstanding debt and final expenses. Surprisingly, this often costs less than you may think.
• Plan: Evaluate what to do in the event that you need long-term care.
• Position and leverage assets: Consider options for how to pass on assets to heirs so that they are tax-free. 

Suppose you have money in bank CDs that you intend for your children to inherit, but you want to keep the money available for unexpected circumstances. The solution could be to position the funds in a single premium life insurance policy. With this type of policy, the account value grows at a reasonable return and could still be cashed in while you are living if necessary. If the funds are never needed during your lifetime, then your children receive a substantial tax-free death benefit.