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Gain More Control Over Taxes in Retirement
High-net worth clients may find their savings working against them when it comes time to pay taxes in retirement. Most of the assets and retirement vehicles will generate a tax bill when providing income. Clients who need death benefit protection from life insurance can also use their policy to provide supplemental income that is income tax-free, potentially helping them reduce income taxes in retirement.
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Actions Creating taxes, not just income
Some financial assets in retirement portfolios create a tax bill every year. Other vehicles designed for retirement trigger taxes when assets are finally withdrawn. With a higher income, even Social Security benefits may be taxed up to 85%! And some vehicles that don’t create taxes aren’t available to high-net worth clients.
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Actions When taxation occurs on common financial vehicles
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LATER
Taxation occurs later on:
- Pensions
- Traditional IRAs
- Annuities
- Traditional 401(k)s, 403(b)s, and other employer-sponsored retirement plans
- Social Security income
LIKELY NEVER
Taxation likely never occurs on:
- Muni bond interest1
- Life insurance death benefits and loans2
- Roth IRAs, 401(k)s, and 403(b)s
- Health Savings Accounts used for medical expenses
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Actions But That’s Not All ...
Other taxes that are likely to continue to rise and may affect your clients’ retirement income include:
- State income tax
- Municipal tax
- Property tax
- Sales tax
- Gift tax
Be sure to consider them all when creating a strategy for the future.
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Actions Use Life Insurance to Help Tame the Tax Bill
In addition to providing a generally income tax-free death benefit3, income tax-free loans and withdrawals4 from life insurance can not only help reduce taxes but can also be used to pay for taxes in retirement. All this with:
- No age restrictions on premium payments, loans, and withdrawals for the life of the policy.
- No premium payment limits based on your client's income (although overfunding can create a MEC).2
- No minimum distribution requirements based solely on age.
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Actions Explore More Retirement Challenges
Add More Life to help solve some of these challenges without causing others.
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Actions If you’re already appointed with Prudential, visit PruXpress to explore more about how life insurance can help your clients meet their protection needs and plan for retirement.
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- 1 May have AMT consequences and may impact taxation of Social Security benefits.
- 2 Federal tax law limits the amount of premium that can be paid into a policy for it to retain certain tax advantages. When premiums exceed this limit, the policy is classified as a modified endowment contract (MEC). Distributions from MECs (such as loans, withdrawals, and collateral assignments) are taxed less favorably than distributions from policies that are not MECs to the extent there is gain in the policy. For distributions from a MEC prior to age 59½, a federal income tax penalty may apply to the extent there is gain in the policy. However, death benefits are still generally received income tax-free pursuant to IRC §101(a). The death benefit will be reduced by any withdrawals or loans (plus unpaid interest). Clients should consult a tax advisor.
- 3 According to IRC §101(a).
- 4 Access to cash value is through loans and withdrawals. In general, loans are not taxable and withdrawals are taxable only when more money is taken out of the policy than has been paid in premiums. Loans and withdrawals may impact the ultimate death benefit payable to beneficiaries. If a policy lapses or terminates with an outstanding loan, the loan becomes immediately taxable to the extent of gain in the policy. Policies classified as MECs receive less favorable tax treatment.
Life insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY), and Pruco Life Insurance Company of New Jersey (in NY). All are Prudential Financial companies located in Newark, NJ.
Cash value life insurance policies are issued by Pruco Life Insurance Company (except in NY), and Pruco Life Insurance Company of New Jersey (in NY). Variable universal life insurance policies are offered through Pruco Securities, LLC (member SIPC). All are Prudential Financial companies located in Newark, NJ.
Prudential Financial and its financial professionals do not give legal or tax advice. Your clients should consult their own advisors.
Created Exclusively for Use by Financial Professionals. Not for Consumer Use.
For Compliance Use Only: 1000597-00002-00 Ed. 12/2020
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Actions Advisors - Life Insurance
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