Basic Definitions• What is Tax Deductible?
– Tax deductible means that whatever amount you contribute to an investment is tax deductible to you at the end of the year. Example: You earned $50,000.00 gross income this year and you invested $3,000.00 into an investment. Your adjusted gross income (income you must pay taxes on) is now only $47,000.00.
• What is Tax Deferred?– Tax deferred means that interest on your principal plus interest earned on interest is not
taxable every year.
• What is Tax Exempt?– Tax-free means that when you receive or earn money there is no taxation on any gains.
• Tax Deductible/ Tax Deferred Vehicles:– 401(k), IRA, TSA, SEP, IRA, Deferred Comp., etc.
• Tax Deferred/ Tax-Exempt Vehicles:– Cash Value Life Insurance, Roth IRA, Muni-bons & Reverse Mortgages.
• Tax Deferred:– Annuities, Investment property.
Your Savings will fall into one of these three circles:
Roth IRAMuni-Bond Funds
Cash Value Life InsuranceReverse Mortgages
Money MarketMutual Funds
CD, Stocks, Bonds
401(k), IRA, TSAAnnuities
Investment Property
Tax Exempt
Taxed Now (Not Tax Deferred) Taxed Later ( Tax Deferred)
Information deemed reliable but not guaranteed.
Ways Taxes Can Impact Your MoneyAssume a 12% Rate-of-Return for a 20 year period with a annual contribution
of $2,000 per year.
Qualified Plans
$2,000 x 30%=$600Index Universal Life
Term/ Index account
– No tax-deductible savings– Tax-free loans (can borrow
against Surrender Value any time*)
– Prior to 59 ½– After 59 ½
*Loans are limited to the amount you can borrow in the earlier years do to a
surrender charge.
Total Contributions =$40,000
Total tax-deductibleSavings
=$12,000
Over$160,000
30% = $48,000 in taxes paid (4 times original tax savings)15% = $24,000 in taxes paid (2 times original tax savings)10% tax penalty prior to 59 1/2
*This is information only, consult your tax advisor for your individual circumstances
Following is a table comparing different savings vehicles.Assumptions are: (a) a 30 year old female (b) $3,000 per year contribution; (c) 7.9% annual return on
investment; (d) 28% income tax rate.
1. $146,501 minus 28% taxes plus a 10% penalty.
2. $146,501 with a cost basis of $60,000 minus 28% taxes plus 10% penalty
3. Tax gains at 28% per year.
4. The life insurance plan is Indianapolis life’s Alliance Performance Series II. The illustration was for a 30 year old female with projected account values based on the non-guaranteed rate of 7.9, a rating of preferred non-tobacco and a starting death benefit of $106,073. As with any financial product purchased, the decision as to who the owner and beneficiary will be made by the client after consultation with his or her tax and legal advisors.
Total Tax Deductions
Account Value In 20 Years
After Tax Account Value In 20 years
IRA, 401(K), TSA, etc.
$16,800 $146,501 $90,830 (1)
Roth IRA None $146,501 $113,631 (2)
Mutual Funds, Stocks, Bonds,
etc.
None $112,797 $112,797 (3)
Annuity None $146,501 $113,631 (2)
Cash Value Life Insurance
None $135,270 $135,270 (4)
Plus a $250,250 death benefit
