50+ Lifestyles

The Benefits of Tax-Advantaged Savings Vehicles

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

Another Tax Season is almost over. How did you make out this year? Taxes can take a big bite out of your total investment returns, so it’s helpful to look for tax-advantaged strategies when building a portfolio. But keep in mind that investment decisions shouldn’t be driven solely by tax considerations; other factors to consider include the potential risk, the expected rate of return, and the quality of the investment.

Let’s take a look at the benefits of tax advantaged savings plans. First know that there is a difference between “tax deferred” and “tax free.”

Tax deferred is not the same as tax free. “Tax deferred” means that the payment of taxes is delayed, while “tax free” means that no income taxes are due at all. For example, with a Roth IRA, after-tax dollars are contributed, but qualified distributions (those satisfying a five-year holding period and made after age 59½ or after becoming disabled) are free from federal income tax.

Tax deferral is the process of delaying (but not necessarily eliminating) until a future year the payment of income taxes on income you earn in the current year. For example, the money you put into your traditional 401(k) retirement account isn’t taxed until you withdraw it, which might be 30 or 40 years down the road! 401K moneys enjoy that advantage of being tax deferred while the money remains in the plan.

Tax deferral can be beneficial because:

The money you would have spent on taxes remains invested. You may be in a lower tax bracket when you make withdrawals from your accounts (for example, when you’re retired). You can accumulate more dollars in your accounts due to compounding Compounding means that your earnings become part of your underlying investment, and they in turn earn interest. In the early years of an investment, the benefit of compounding may not be that significant. But as the years go by, the long-term boost to your total return can be dramatic. Most annuities – both qualified and non-qualified – are income tax deferred. No taxes are due while the annuity remains. Interest earnings continue to compound with no tax reporting required. That’s what makes annuities a very attractive. During this month of April we continue our virtual Community Meetings on Medicare. Next virtual meetings are April 18 and April 20.

If becoming eligible for Medicare, I am sure you are getting lots of solicitations to sign up for a plan. To make sense of all those solicitations call Craig at 563.332.2200 to participate in these virtual meetings. Or check our website: www.dickschillig.com Scroll over to the contact icon for our email address.

Richard J. Schillig, CLU, ChFC, LUTCF is an Independent Insurance and Financial Advisor with RJS and Associates, Inc. He can be reached at (563) 332-2200.