Are You Diversifying Your Income Taxes?

Income tax diversification is a strategy that can significantly impact your financial well-being during retirement. If you’re currently saving for retirement, you likely understand the concept of investment diversification, which involves spreading your investments across various asset types to balance risk and return.

This principle can also be applied to income taxes. It’s beneficial to have financial assets that provide different types of tax advantages throughout the stages of retirement saving.

Selecting options that offer tax benefits at different stages can help you grow your retirement savings more effectively, minimize your tax liability, and maximize after-tax spendable income in retirement. *

Find a Financial Professional

Diversified Tax Base

To achieve a diversified tax base, you want financial assets that offer different types of income tax advantages as you:
  1. Save for retirement (Contribution)
  2. Grow your savings (Accumulation)
  3. Use your savings for retirement income (Distribution)

There are particular income tax advantages offered by different financial instruments at each of these stages.

Contribution Phase

During this phase, you’re saving for retirement. Consider the advantages of pre-tax and after-tax contribution options. Diversifying across both pre-tax and after-tax options may provide multiple sources of income, which can positively impact retirement savings outcomes and longevity:
  • Pre-tax Contributions: Pension plans, profit sharing and other qualified retirement plans like 401(k) and 403(b) plans allow you to contribute on a pretax basis, reducing your immediate tax liability.
  • After-tax Contributions: Roth 401(k)s, Roth IRAs (eligibility requirements; contributions are limited). Cash Value (Whole) Life Insurance (premiums limited by coverage amount, subject to underwriting limits).

Accumulation Phase

Consider diversifying across various accounts that offer tax-deferred accumulation to minimize the impact of taxes on savings growth:
  • Taxable Accumulation: Traditional (taxable) brokerage accounts, savings accounts, CDs, and Money Market accounts are generally not tax-deferred and are subject to tax on gains.
  • Tax-Deferred Accumulation: 401(k), 403(b), IRAs, Annuities, Cash Value (Whole) Life Insurance are account types that offer tax-deferred accumulation, which can maximize savings growth.

Distribution Phase

In retirement, it may be advantageous to have more than one source of income, especially during market downturns. Including additional sources of retirement income like tax-free and/or tax-advantaged options can increase retirement income longevity:
  • Taxable Distributions: From tax-deferred accounts such as 401(k), 403(b), Traditional/Rollover IRAs, taxed at your ordinary income rate.1
  • Tax-Free Distributions: Roth IRAs, distributions are income tax free if the owner is 59½ and has had the account for five or more years.
  • Tax-Advantaged Distributions: Cash Value (Whole) Life Insurance, policy cash values accumulate tax deferred and may be accessed on a tax-advantaged basis.2 Life insurance death proceeds are generally income tax free.

Knowledge Into Action

Tax diversification can significantly impact your lifestyle choices during retirement. Consider including retirement savings options that offer tax deferred accumulation as well as tax free and/or tax advantaged retirement distributions, which may significantly improve retirement income outcomes and longevity.

Remember, what, when, and how you save is arguably as important, if not more important, than what you earn. Review your income tax diversification options with a financial professional now.

Find a Financial Professional

IMPORTANT DISCLOSURES

1. Subject to 10% penalty for distributions prior to age 59½. Required Minimum Distributions (RMD) starting at 70 ½ if you were born before July 1, 1949, age 72 if you were born after June 30, 1949 and before January 1, 1951. The RMD age will increase in 2033 to age 75.

2. Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½.

Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse and may result in a tax liability if the policy terminates before the death of the insured.

Product availability varies by carrier, state, and individual eligibility. Not all products listed are available in all states or to all applicants. Product descriptions on this page are for general informational purposes only and do not constitute a solicitation or offer to sell any specific insurance or annuity product. All products are subject to underwriting approval and applicable state insurance regulations. Riders and benefits are subject to additional charges, terms, conditions, and limitations. Variable products involve investment risk, including possible loss of principal, and are sold by prospectus. FundaDream Insurance Solutions, Inc. is a licensed California insurance corporation. Consult the applicable carrier contract for full terms, conditions, and limitations. FundaDream’s charitable giving is made from general corporate revenues at the sole discretion of FundaDream leadership and does not constitute compensation to any licensed insurance professional.

The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.

The information provided is not written or intended as specific tax or legal advice. FundaDream, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Insurance products and services are offered through FundaDream Insurance Solutions, Inc., California License No. 0M95835