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Tax Strategies: Using Tax Advantaged Vehicles for Portfolio Growth

Posted by Larry Jones on Aug 2, 2016 10:30:00 AM
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The Power of Tax-Deferral

When it comes to growing assets for retirement, especially in today's volatile economic environment, you want to take advantage of every break you can get. One of these breaks is through the use of a tax-deferred vehicle, such as a 401-k, IRA, or 403-b plans, etc. How do these plans work? Quite simply, any growth inside them is sheltered from taxation in the accumulation phase. You don't pay the taxes until you begin to take the money out and spend it. This becomes a huge advantage over time.

For example, let's look at a person, age 45 who has $100,00 in a 401-k. She's in a 25% tax bracket. Let's assume this person contributes nothing else for 20 years, and that she averages an 8% return over that same 20 year period. At age 65, in a normal non-tax-deferred account that money would have grown to over $306,000.

But since she was in a 401-k, all of her earnings continued to grow without being taxed. Now the value is well over $466,000, an increase of $145,000. As tax strategies go, this is a good one.

What's the downside to using these tax-deferred vehicles? There are limits as to how much you can contribute to them each year. So what's a person with a very healthy investment budget to do?


The Variable Annuity

There is another vehicle out there which will offer the same tax-deferral advantages as the above plans, but has no contribution limits. It's an insurance product: the annuity. Any growth inside of an annuity is tax-deferred. Without going into all of the details of the annuity world, let's focus on the two general types of annuities, fixed and variable. As far as fixed products go, you're not likely to see any exceptional returns, possibly 3-5% tops, although this growth can be achieved without market risk. However, with a variable annuity, market rate returns are possible, albeit along with market risk.

The typical variable annuity is simply a wrapper around an investment portfolio. There are no guarantees with a variable annuity, as there are none with your broker-dealer. Some VA's will carry some living benefits, such as long-term care provisions or a lifetime income, and also death benefits, such as a guaranteed life insurance payout. Using a variable annuity to achieve tax-deferred growth can work very well for high net-worth clients. This is probably the chief selling point of these things, but keep in mind that things may not work as planned at distribution time. Why not?

Because a distribution from an annuity (or any other tax-deferred vehicle) is taxed at ordinary-income tax rates, while distributions from a brokerage account will be at a long-term capital gains rate, which today is around 20%. This needs to be considered if you're in a high tax bracket. However, VA's can work very well IF the market doesn't tank just as you're about to access the money, and IF you are in a lower tax bracket at distribution. Also, the longer time horizon you have, the better.

VA's have a couple of very serious drawbacks. Fees are some of the highest of any product out there. Annual fees can be in excess of 3.5% a year. That means for a $200,000 investment you'll be spending $7,000 a year. You are also giving up liquidity for a period of time, as these things will lock you in, usually for 7-10 years.  Leave early and you'll pay a hefty penalty.

Why do stockbrokers love VA's so much?

Well, think about it. By putting you in a VA he's getting a hefty commission, a front-end load, and he's got you locked in as a customer for 7 years.

Is there a better way?

You might have gotten the idea that I'm not a huge fan of VA's. In general, I'm not. There are things to like about them, however. The tax-deferral aspect, especially for high net-worth folks can be significant. What if you could find a VA with no fees, no commissions to the broker, and you could leave any time you wanted to, with no penalty? That would be a game changer!

At Navstar we are able to offer a no-load variable annuity with no penalties for early withdrawal. The power of this product is substantial. And as if that's not enough, we're able to utilize our tactically-managed funds inside of it. It's the best of both worlds! What if you're already locked into a VA? Let us do a break even analysis to discover how long it would take you to break even if you switched. You'll be surprised how quickly not paying those fees every month will overcome any withdrawal penalty you might suffer where you are now. Remember, it's just math.

Until next time,


Are you retiring soon, or already retired? Are you taking advantage of our weekly webinar? You should be!  To see a list of topics that will be discussed, click here:

Retirement (what you need to know)


Topics: Tax Deferral

What you don't know can hurt you!

As a fiduciary I am required to always act in your best interests, and as a professional planner, it's my job to be familiar with all types of possible solutions and financial vehicles. In short, I have no interest in selling any particular product or any affiliation with a particular company. I work for my clients.

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