Options for Tax Advantaged Retirement Planning

Taxes eat up the profits of a portfolio. An average American spends more days working to pay federal, state, and local taxes than they do to pay for housing, food, and clothing combined.

A study by the Tax Foundation called "Tax Freedom Day 2013" found that the average American worked 107 days to pay taxes in 2013.

Every day that you and your assets work toward paying taxes is a day your resources are not efficiently working towards your retirement goals. We want to see as much of our money building the portfolio and not going to pay taxes.

A great way to leverage our tax bill is to take advantage of the retirement plans that have tax advantages such as IRAs, 401ks, Roths, 403bs, and others. Because those programs have drawbacks and limits to the amounts we can contribute, we use additional ways our individual clients can delay the tax bill and use that money to build their retirement portfolio.

 Consider using a tax-deferred vehicle to delay the impact of taxes. In a taxable vehicle, you could pay taxes on your earnings each year. Some taxable vehicles have the problem that taxes could be due even in years when the portfolio went down.

In a tax-deferred vehicle, earnings are free of taxes until withdrawn. In any tax environment, it makes good economic sense to delay taxation as long as you can or until your income falls into a lower tax bracket.

One type of tax-deferred vehicle for you could be a tax-deferred annuity. Taxes you pay annually on earnings, such as interest, dividends and capital gains, can erode the total amount set aside for your retirement.

When an individual owns a tax deferred annuity, the tax on the earnings will not be due until the earnings are withdrawn. By postponing taxes with a tax-deferred vehicle, your money has the opportunity to grow faster because money that would have gone to pay taxes now remains in the account to pay you in retirement.

A tax-deferred annuity is a contract between an individual and an insurance company that may also provide guaranteed retirement income options. The guaranteed income for life options are backed by the claims-paying ability of the insurance company and vary widely from company to company. It is always best to work with a trusted advisor to find the annuity benefits that are most appropriate for your situation.

To illustrate the power of a tax-deferred portfolio, I will compare it to a portfolio where the earnings are fully taxable. If a $100,000 portfolio grows tax-deferred by a hypothetically assumed rate of 8 percent annually, the value will be $466,096 at the end of 20 years before any withdrawals.

If that same $100,000 portfolio is invested in a currently-taxed vehicle with that same hypothetical 8 percent annual growth, it will be worth only $306,000 at the end of 20 years assuming the portfolio is in a hypothetical 28 percent tax bracket each year and the taxes are paid annually.

Alan Friedlander owns a financial service practice in Chicago’s suburbs. For a free consultation of your situation, feel free to contact Friedlander directly. He can be reached at 847-855-4888 or Alan@FinancialServices4me.net.

Advisory services offered through D.H. Hill Advisors Inc. Securities offered through DH Hill Securities, LLP. Member SIPC/FINRA. (Neither DH Hill nor Friedlander Financial Services offer legal or tax advice.) "This is not meant to be an offer to buy or sell a security"