As Benjamin Franklin famously said, nothing is certain in this world but death and taxes.
Centuries later, it's still a fact of life: Taxes are inevitable for us all. And when it comes to building a financial foundation, they can be a daunting obstacle. The average American spends more on taxes than on food, shelter and clothing combined.† When viewed through the lens of investing, this means that every day you and your assets work toward paying taxes is a day your resources are not working toward your long-term objectives.
So, what if there was a way you could delay paying taxes on investment earnings and instead potentially keep your money at work for you? Fortunately, there is.
*Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such as a 401(k) or IRA. It also may not be available if the annuity is owned by a "non-natural person" such as a corporation or certain types of trusts.
†Scott Greenberg, Tax Foundation, "Tax Freedom Day 2016 is April 24," April 6, 2016.
What is an Annuity? An annuity is a long-term, tax-deferred vehicle designed for retirement. Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½.
Keeping More of Your Money
One way to delay the impact of taxes — and in some cases lessen the impact considerably — is with a tax-deferred investment vehicle. Rather than paying taxes on your investment earnings each year, you can allow investments to potentially grow without incurring taxes until withdrawn. This can help keep all your principal and earnings, including money that would otherwise be diverted to taxes, working for you.
Also consider that if you wait until retirement to withdraw your investment earnings, you may be in a lower income tax bracket, which could reduce your tax burden.
The accompanying hypothetical example compares taxable vs. tax-deferred growth of $100,000, assuming an 8% annual rate of return and a 33% federal tax rate over a 20-year period. As you can see, whether you withdraw a lump sum or spread out your withdrawals over time, the tax-deferred account is significantly more valuable than the taxable account after the 20-year time period.
The bottom line is that no matter the rate of return, investments in a taxable account take longer to grow than those in a tax-deferred account.
Going beyond the impact taxes can have on your investment portfolio, it's also important to consider their impact on the inheritance you pass on to loved ones. With strategies available to help you optimize and streamline the transfer of wealth, a tax-deferred investment vehicle could provide lasting benefits for your beneficiaries.
Knowledge is power when it comes to taxes and almost anything in the investing world, so do your homework. Complete as much research as possible on the ins and outs of every investment, and make sure to take specific care to focus on how the tax features of each fit with your objective and goals. It might also make sense to work with an advisor or tax professional to take advantage of their experience and expertise in this all-important area.
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Learn more about the investment and benefit options available in Jackson’s variable annuities (VAs).