Investing Options for Pending Tax Increases :: Wamhoff Financial & Accounting

Investing Options for Pending Tax Increases

When planning for retirement, investors must take tax consequences into consideration – especially today when we may be facing tax increases after December 31, 2012. Which investment vehicles make sense for our uncertain tax future?  Bob Wamhoff, President of Wamhoff Financial Planning and Accounting Services, shares this insight:


Option 1: Variable Annuities*

  • A variable annuity is an insurance product that is a contract between the investor and insurance company that provides lifetime income in exchange for a lump sum investment.
  • Annuities are tax deferred and provide guaranteed income.
  • Tax deferred, so you don’t pay taxes on the gains until you begin withdrawing the money
  • No time limit to take the money out, so you could time the withdraws for more favorable tax times
  • Professionally, actively managed funds
  • Offer riders for death benefit so your beneficiaries will receive a certain amount upon your death, and living benefit to guarantee a certain rate of return.


Option 2: Tax Exempt Bonds

  • Municipal bonds that are issued for specific improvement projects within that jurisdiction. They could be for projects such as the construction of schools, roads, recreational facilities, or sewer/infrastructure improvements.
  • Interest earned on these bonds is exempt from taxes if it is purchased by a resident of that jurisdiction.
  • The interest is also exempt from federal taxes.
  • While there are tax advantages, it should be noted that the rate of return is lower than other investment options.


Option 3: Allocate More to Tax Qualified Accounts, Withdraw from Non-Qualified Accounts

  • Tax qualified accounts include 401(k), 403(b), 457, and Simple IRA’s. These are investments that are made with pre-tax dollars.
  • Non-qualified accounts have already been fully or partially taxed, such as stocks, bonds, and REIT’s.
  • During times of higher taxes, it makes sense to maximize dollars going into qualified accounts.
  • It’s always a good idea to withdraw from non-qualified accounts first since you’ve already been taxed on the money, but it’s even more important during times of higher taxes.


Option 4: Sheltered Real Estate

  • The depreciation on real estate as an investment helps to shelter the income because depreciation is treated as an expense for tax purposes.
  • Property taxes may be tax deductable.


*Variable annuities are subject to surrender charges and involve risk, including possible loss of principal invested. Guarantees are based on the claims paying ability of the issuing insurance company. Withdrawals of earnings from an annuity are taxed as ordinary income and, if taken prior to age 59 1/2 may be subject to a 10 percent penalty. Generally, annuity contracts have mortality and expense charges, as well as other account and administrative fees. Variable annuities used within qualified plans do not offer additional tax deferral benefits.