Fear Of Taxes Can Harm Seniors
April 16 2005 Guarding Your Wealth is a nationally syndicated weekly personal finance column written by Jeffrey D Voudrie CFP Mr Voudrie is the President of Legacy Planning Group a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients investments Please visit our website wwwguardingyourwealthcom to read past articles in our archive
When it comes to investing avoiding taxes should not be your primary concern Regardless of how much that financial salesperson talks about the importance of deferring taxes you need to stop and consider these important facts before you make a decision Otherwise you can actually lose money instead of saving it
As I talk with seniors from across the nation it's obvious they loathe paying taxes Financial salespeople often play on this dislike of paying taxes to motivate seniors into buying a highcommission investment even though it will earn the senior less in the long run The only one earning more in this situation is the salesperson
There are two basic kinds of taxadvantaged investments-taxfree and taxdeferred The two are often confused even though they are very different For instance municipal bonds are taxfree You don't have to pay any Federal income tax on the interest that you earn on a municipal bond-ever This allows municipalities to borrow money for public works projects at lower interest rates saving the public money
The simple way to calculate whether you are better buying a taxfree municipal bond versus a taxable bond is to divide the taxfree yield by 1 minus your tax rate For instance if you are in the 28 tax bracket and a 10year municipal bond is yielding 378 then you divide 378 by 72 which equals 525 That means that you would have to earn over 525 on a taxable bond to give you more after tax income then the municipal bond
Taxdeferred investments work quite differently Annuities are the most often used taxdeferred investment You don't avoid paying income tax in a taxdeferred investment You only delay paying taxes which are due when money is taken out of the taxdeferred vehicle If you don't plan on using the money yourself the taxes will still have to be paid at your death
Not only will you have to pay taxes on taxdeferred investments in the future it is likely that you will have to pay more in taxes then compared to paying the tax now for two reasons
First any earnings on a taxdeferred vehicle will be taxed at ordinary income rates-for instance the 28 we assumed earlier If you invested that money in an investment that paid dividends andor capital gains and paid the taxes now you would only have to pay taxes at the 10 or 15 level
That's a huge difference In our example earnings taken out of an annuity will be taxed at 28 Dividends and capital gains off of a mutual fund will be taxed at 15 That's a 13 difference
Financial salespeople will use the fear of paying taxes in an attempt to convince a 70 or 80 year old that they should buy an annuity That is completely bogus Studies have shown that your money must be left in an annuity for 2030 years before you begin to see the benefits of taxdeferral Again the only one benefiting from the transaction is the salesperson Don't fall for this trap
Another trick that financial salespeople will use to sell an annuity is to say that it will keep your Social Security from being taxed That's true but if you use an annuity you'll push all those taxes down the road Later on that could force you or your heirs if you're deceased into a higher tax bracket and you'd end up paying more
Here's the bottom line If you're in a tax bracket of 27 or higher then use taxfree municipal bonds for the income portion of your portfolio For the equity portion of your portfolio use taxefficient vehicles like ExchangeTraded Funds where you can control the timing of the tax event while having the dividends and capital gains taxed at much lower rates
As you can see there isn't a single case in my opinion where an older investor will benefit from a taxdeferred annuity With current tax rates it just doesn't make dollars and sense Be smart do the simple math and you'll come out ahead
Got questions Go to wwwguardingyourwealthcom and click on 'Ask Jeff' I'll be glad to personally give you an unbiased opinion Visit our web site to read previously submitted questions and answers
In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner Mr Voudrie serves clients nationwide using a proprietary money management system hes personally developed
Looking for an energetic expert who is passionate about financial and wealth management Mr Voudrie is an excellent speaker who will excite and inspire your audience Mr Voudrie is available for a limited number of speaking engagements television appearances and radio talk shows For booking information email email protected from spam bots
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