With tax diversification, you may be able to keep more of your money. As the example shows, dedicating some assets to the tax-free income category means that you may ultimately have more money to use in retirement. 1 And the higher tax rates go, the more advantageous this strategy may become.
Retirement income of $100,000
Without Tax Diversification
$78,000 to spend after taxes
$100,000 401(k)/qualified plans
= $22,000 tax
100% taxable
$100,000 taxed at 22% 3
$50,000 401(k)/qualified plans $50,000 4 cash value life insurance
= $6,000 tax
100% taxable
$50,000 taxed at 12% 3
Tax Diversification Strategy
$94,000 to spend after taxes
$50,000 taxed at 0% 5
= $0 tax
tax free 5
Hypothetical example of an approach to tax diversification for illustrative purposes only. This does not represent the performance of any particular product. Your actual results will vary and may be more or less favorable.
What you do today, can lower your taxes tomorrow. Let’s get started.
3 Assumed marginal federal income tax bracket under current rates. Assumption includes state and other local taxes in addition to the federal income tax. 4 As stated earlier, accessing the cash value through loans or withdrawals (i.e., partial surrenders) will reduce the available cash surrender value and life insurance benefit. Loans accrue interest. Policy values are in part based on non-guaranteed factors, such as dividends and interest rates, which are subject to change. Therefore, the supplemental retirement income is not guaranteed. 5 If structured properly. Policy loans and withdrawals will reduce the life insurance benefit and may cause the life insurance policy to lapse.
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