According to Lincoln Financial Group, tax planning shouldn’t be a once-yearly April exercise, but rather an ongoing effort throughout the year.
From the client’s perspective, the amounts and sources of income, including investment income, along with health and family considerations—short and longer-term—often change throughout the year. Tax rules on the federal and state level rarely remain static.
In addition, an advisor success is measured by the performance of his clients’ total portfolios, as well as his ability to offer clients various options to manage taxes. This is due to both the changes clients face and the lack of understanding they have about the far-reaching impact of taxes on their investments.
“Financial advisors can help consumers understand the complexity of issues around taxes, as well as underscore that every dollar here and there can make a difference,” said Chris Price, advanced sales attorney, advanced annuity sales for Lincoln Financial Distributors. “A financial professional can give attention to a host of complex rules and regulations such as analysis of marginal tax rates, phase-outs for itemized deductions and personal exemptions, and develop a smart plan for diversifying retirement income streams and, thereby, significantly reducing the impact of taxes on their retirement.”
Not surprisingly, many consumers are unaware of changes to taxes on capital gains and dividends and even the effect of the 3.8 percent Medicare tax. Similarly, they may not know that income from tax-exempt investments may not be exempt in all states and is included in modified adjusted gross income (MAGI), which may have bearing on the taxes paid on Social Security or Medicaid premiums.
During a Lincoln-sponsored webcast for financial advisors titled “Help Protect Your Clients From Tax Risk,” the company addressed these issues and the importance of tax-efficient strategies that use life insurance and annuities to reduce long-term tax exposure and create tax-advantaged retirement income. An astounding 87 percent of Americans do not use tax-deferred investments as a primary way to reduce their taxes, according to a Lincoln Financial Group survey, “2013 – Expense Challenges of Age 62-75 Retirees.”
“Both annuities and life insurance should be considered as part of a diversification strategy,” said Price. “Annuities offer tax-deferred growth as taxes are only paid at the time of withdrawal when typically many investors are in a lower tax bracket. For its part, life insurance distributions are tax-free and don’t affect either adjusted gross income or modified adjusted gross income. Both of these investment vehicles can be a useful component in estate planning.”
“These basic benefits of tax-deferred and tax-free investments are clear,” added Kevin Cox, advanced sales consultant, life sales, Lincoln Financial Distributors, “but there are other advantages related to wealth transfer that should also be a consideration. “With annuities, compound growth is earning interest on your interest. The longer you hold onto your annuity, the greater the power of tax deferral and compounding on your assets and the greater the possibility you may leave more money to your heirs. Life insurance provides for an income tax-free legacy, as there are no taxes paid on a death benefit.”
Taxes are just one of the many challenges clients now face in regard to their retirement income, making wealth protection as much of a consideration as accumulation and performance. Advisors can find more information about Lincoln Financial’s wealth-protection expertise by visiting www.wealthprotectionexpertise.com.
By Ayo Mseka