You’ve done all the right things. You worked hard all your life and built a successful career or created a profitable business. You have saved and invested and met your financial goals.
Now, how do you hang on to it?
You need a plan to preserve the wealth you’ve worked so hard to build. You need to find ways to safeguard it so it can fund your retirement. And perhaps even pass along some of your nest egg to your loved ones.
That may not be an easy task in the years ahead as Americans likely face higher income and/or estate taxes in the future because today’s tax rates are among the lowest in decades.
Here are a three tried and true tax-savings and wealth preservation strategies you should consider.
Most of us are familiar with the tax-deferred investment advantage of a traditional Individual Retirement Account (IRA), or a workplace 401(k) plan. But you may not be fully aware of the additional benefits a Roth IRA can provide, or the advantages of converting your traditional IRA to a Roth IRA.
Here are the Roth IRA basics …
Anyone can convert eligible IRA assets to a Roth IRA regardless of annual income, marital status, or account balance.
Think of a Roth conversion as modifying your retirement account from being taxed on the way out, perhaps at much higher tax rates, to being taxed on the way in, at individual tax rates that are the lowest in decades.
Also, you can reap the same tax benefits from a so-called “back door” Roth IRA conversion by simply making a non-deductible contribution to a traditional IRA. Then you immediately convert those assets to a Roth IRA tax-free.
This is a recurring tax savings and retirement planning strategy you can repeat over and over, year after year.
One of the most powerful tax advantaged savings and estate planning tools there is today involves permanent life insurance. It gives you the potential to accomplish two important things at the same time.
First, you can build up tax-deferred growth of your money inside the policy in your lifetime, just like an IRA. And second, you can transfer your assets free of both income and estate taxes to your beneficiaries. And permanent life insurance policies enjoy favorable tax treatment.
In some cases, you can withdraw cash from your policy outright to help meet needs such as paying for a child’s college education or covering medical expenses.
This type of policy is tax-advantaged because the growth of the cash value is generally on a tax-deferred basis, meaning that the policyholder pays no taxes on any earnings as long as the policy remains in force.
As long as certain premium limits are met, withdrawals can be considered policy loans, which are not typically considered taxable income. In fact, withdrawals up to the total of premiums paid into the policy can typically be taken out tax free.
The right insurance plan also gives you the ability to transfer the policy’s benefit income tax-free to heirs. No matter how large the death benefit, your beneficiaries won’t pay income tax on the money they receive.
A charitable lead annuity trust, or CLAT, may sound complex, but it can be a valuable tax-advantaged why to handle the sale of your business and pass along proceeds to a favorite charitable organization and to your family, while reducing the future impact of estate taxes.
Basically, a CLAT is a type of trust you set up to payout set dollar amounts each year to a charity of your choice for a certain number of years. It is most often used to transfer assets to the next generation with little or no estate or gift tax liability.
And it also provides you with an immediate income tax deduction if properly set up.
The big advantage here is to arrange for that large upfront deduction in the current tax year when you expect to have a sizeable amount of taxable income, perhaps from the sale of your business, for instance.
With today’s historically low interest rates, the IRS-mandated discount rate on a CLAT is just 0.6% this year. So, if the money in your trust is invested wisely, any growth above and beyond that low 0.6% hurdle rate is not considered taxable under current IRS rules. And it can be passed to your heirs tax-free!
Bottom line: There are plenty of strategies available to help you preserve your wealth and pass it along to your loved ones while lowering your tax bill in the process. To help you make sense of the tax-advantaged options you have at your disposal, simply contact TSP Family Office at (772) 257-7888 to see how you and your family may be able to take steps to better preserve your nest egg.