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Preparing for the Fiscal Cliff
Sunday, 02 December 2012 15:22

Two things are certain in life: Death and taxes. We don't know when we will die, but it's pretty certain that taxes are going up on January 1, 2013. What can you do to prepare?

Until we have a Congress willing to reign in spending, tax increases are inevitable. We cannot keep borrowing more money to finance current spending.

There are three ways the government can fix their addiction to spending:

  • Tax increases
  • Spending cuts
  • Printing money

Of the three, tax increases are always going to be the most debated issue. Spending cuts will be largely ignored, and most of what you hear about will be funny new math, such as a reduction in the projected growth of spending, which isn't a reduction in spending at all. Printing money will go on quietly, and nobody will notice the creeping result: Inflation.

There are things one can do to combat the effects of increasing taxes, inflation, while also solving some of life's other financial problems.

  1. Save for the future using Tax Efficient Strategies, such as Roth IRAs and Investment Grade Life Insurance, both of which produce tax-free retirement income.
  2. Add Principal Protection investments, like a Fixed Annuity or Index Annuity, to your savings and retirement portfolio. Here's why: An increase in the ordinary income tax rates AND the tax rates on common stock dividends (which are already double-taxed) will result in public companies looking to redeploy their excess capital in other ways besides rewarding stock holders with cash dividends. This will almost certainly result in higher market volatility, as the return on common stocks becomes more reliant on capital appreciation rather than the yield. This will result in more speculation, and more short-term trading. Higher volatility means that some investors are going to suffer, as they did in 2000, and again in 2008.

Losing half of your portfolio during the year or two prior to retirement can be devastating. There are people today who still have not recovered from the market crash in April, 2000.

If you're already retired, in addition to adding investments with Principal Protection to your portofolio, you can also greatly reduce both potential losses due to increased stock market volatility, as well as the inevitable principal losses in bond markets as interest rates rise from their current historic lows (plus the increasing default rates of municipal bonds). How? By integrating mortality credits to your portfolio through the strategic use of Immediate Annuities that pay an income to you that cannot be outlived.

For your after-tax savings, one strategy that both greatly reduces income taxes AND guarantees that you cannot lose your Principal due to stock market and bond market volatility, is the Split Annuity. Properly structured, they can pay a regular income that's often over 90% tax-free, and in some cases, as much as 99% and even 100% tax free. The net income after tax is often superior to other fixed income investments.

If you own a business, there are additional options to consider that can greatly reduce your income tax burden, as well as help you build long term wealth:

  1. Set up a 401(k) Plan. Tax deductions can be over 100% of your salary, in certain situations.
  2. Establish a Defined Benefit Pension Plan. Current income tax deductions in excess of $100,000 to over $300,000 are possible, depending on your situation.
  3. Front load your retirement plans using Financed Planning techniques. You can add $100,000 to $1,000,000 or more to your retirement plan this year, and use your business cash flows and/or Accounts Receivable to finance the lump-sum purchase of a retirement plan with Principal Protection and significant tax advantages. These Financed Planning techniques can also be used to fund the sale of a business to a third-party, or to faciliate the retirement of an owner while transferring the business to the next generation, in a very tax-efficient manner.

A prudent person should not perform the Ostrich Manuever in the face of Congressional irresponsibity, market risk, and the very uncertain tax environment. That's where I can help. The call is on me (800) 680-5596.

 

Brent D. Gardner, CLU, ChFC