Tax advantaged Retirement accounts

Tax-exempt Retirement accounts are funded with post-tax income and, because taxes have already been paid on the invested money, no taxes are due at withdrawal time. Capital gains inside a tax-exempt Retirement account are tax-free. 

Investors who expect their income to be lower in retirement will benefit from tax-deferred accounts while tax-exempt accounts will be advantageous for investors expecting relatively high income during their retirement years.

For many investors, maximizing the IRS-allowed tax advantages in their Retirement accounts will involve a combination of both tax-deferred and tax-exempt Investment vehicles.

In this brief article we’ll focus primarily on tax-deferred Retirement accounts.

401K plans fall into this category along with Thrift Savings Plans (TSPs), which are available to all Federal employees and military service members. 403(b) plans cover not-for-profit employees like teachers while 457 plans are offered to state and local government workers.

Some employers offer matching contribution programs for their employee Retirement accounts as a perk of employment. For example, a company might match an employee’s 401K contribution on a dollar-for-dollar basis up to a limit of 3% of the employee’s salary.

Making maximum contributions to employer-provided retirement plans is a good Investment strategy as long as the working investor can afford that level of retirement savings.

Before maxing-out a defined-contribution plan the prudent investor will set aside enough money to cover at least six months of living expenses. This money is ideally held in some form of readily available savings account (not a 401K or TSP).

IRAs

Individual Retirement accounts (IRAs) can be funded with either pre-tax income (Traditional IRA) or post-tax income (Roth IRA).

IRAs are typically used to hold securities like mutual funds, stocks, and bonds.

The Taxpayer Relief Act of 1997 provided new retirement options for taxpayers including the self-directed IRA. This new Investment vehicle allowed investors to own asset classes like real estate, fine art, and Precious metals inside their tax-advantaged Retirement accounts.

In a self-directed IRA the investor can open a brokerage account in order to actively or semi-actively trade securities inside their tax-advantage Retirement account. Faster growth of the account is possible because 100% of all trading profits can be compounded without the loss caused by annual capital gains taxes.

During the Precious metals bull market that ran from 2002 to 2012 investor demand for Gold IRAs increased significantly.

Throughout the 2002 to 2012 period existing Investment management companies responded to this demand while new companies sprang into existence with a singular focus on providing Precious metals IRAs. The creation of new Gold IRA products accelerated after the 2008 financial crisis. 

SEP-IRAs

Simplified employee pension (SEP) plans provide an easy way for business owners to setup a retirement plan for their employees. The employer typically makes regular contributions to the SEP-IRA as part of the plan.

Each employee’s account within the SEP plan is a traditional IRA and these SEP-IRAs follow the same IRS rules as traditional IRAs.

One of the SEP-IRA accounts belongs to the person establishing the SEP plan. This is one of the ways a business owner can fund their retirement through the business.

Self-employed individuals can also setup SEP-IRA plans. Having employees is not a requirement.

SEP-IRAs provide these benefits for small business owners and self-employed individuals:

• The person establishing the SEP plan is able to contribute to their own retirement savings through the business while also participating in other tax-advantaged Retirement accounts outside the business.

• An employer can contribute as much as 25% of an employee’s salary to that employee’s SEP-IRA with a maximum contribution of $58,000 per year (in tax year 2021).

• Employer contributions made to a SEP-IRA do not affect the individual’s IRS-allowed maximum contribution for IRAs. For example, the business owner / self-employed individual could contribute $15,000 to their SEP-IRA and also contribute $6,000 ($7,000 after age 50) to traditional or Roth IRAs.

Using a SEP-IRA in combination with traditional and Roth IRAs an investor could potentially save $64,000 per year ($65,000 after age 50) inside their tax-advantaged Retirement accounts.

Fixed deferred annuities

Fixed deferred annuities are low-risk savings plans offered by insurance companies. They typically provide a guaranteed rate of return for a designated number of years.

Interest earned in a deferred annuity accumulates on a tax-deferred basis, meaning the investor doesn’t pay taxes on the interest in the year the interest is earned. In contrast, interest earned on a CD or savings account is taxable in the year it is earned.

This tax-deferred treatment of earned interest allows taxpayers to minimize their Investment income during their working years when they are paying high tax rates. In retirement the earned interest can be distributed as regular income at whatever tax rate the investor is subject to at the time (typically a lower rate than during working years).

Investors receiving Social Security payments may enjoy another benefit provided by fixed deferred annuities.

Because Social Security payments become taxable if the recipient is earning too much money, retirement savings can be placed in a deferred annuity where the interest earned won’t be counted as income. This allows the investor to minimize their Investment income so it doesn’t reduce their Social Security payments.

Variable deferred annuities

In contrast to fixed annuities, variable annuities do not offer a guaranteed interest rate over a specified period of time.

Instead, the performance of the Investment vehicle can vary over the years and a variable annuity may outperform a fixed annuity depending on the performance of the underlying Investments. Because variable annuities do not have a guaranteed return they obviously involve higher risk than fixed annuities.

Variable deferred annuities receive the same tax treatment as fixed deferred annuities.

Whole life insurance

Life insurance can play a key role in a robust retirement plan.

A life insurance policy allows an investor to instantly create a legacy for their family. From the very first payment the policy guarantees a fixed payout to the investor’s beneficiaries.

Whole life insurance provides a legacy while also providing a tax-deferred savings program for retirement.

These policies guarantee a fixed death benefit and the cash value of the policy increases over time on a regular schedule.

In addition to the guaranteed increase in cash value, policyholders usually receive annual dividend payments from the insurance company carrying the whole life policy.

The IRS treats the increasing value of the policy as income but defers the taxes due until distributions begin in retirement.

Whole life insurance will make sense for some investors. Business owners and self-employed individuals in particular might give some thought to how an employer-provided whole life insurance policy could fit into their retirement plan.

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Tax sheltered Investments fall into these general categories:

• Real estate

• Defined-contribution retirement plans (employer-provided plans like 401K, 403b, 457, and TSP)

• Tax advantaged Retirement accounts

• Medical savings accounts (pre-tax money set aside specifically for healthcare)

• Business ownership

• Complex Investments

• 529 savings plan for sending kids to college

• Custodial IRAs to hold long-term savings for minors

• Charitable remainder trusts

• Investments in Qualified Opportunity Zones (QOZ)

Investors can fund a 529 plan with up to $75,000 initially. That's five year's worth of normal maximum contributions ($15K per year) accelerated into a single year.

Real estate investors can further leverage their tax benefits by purchasing rental property in a Qualified Opportunity Zone using a self-directed IRA.

Before setting aside long-term savings it is prudent to place six months’ worth of living expenses into some liquid form of savings. This money won’t gather much interest but we can consider that drawback as the cost of financial insurance.

Once we are in a position to make long-term contributions to our retirement savings we have to think about the tax-free Retirement account qualifications defined by the IRS.

Contribution and withdrawal limits for each of the tax advantaged Retirement account types is detailed by the IRS and these limits vary based on an investor’s age and income bracket. Some of the tax advantaged Retirement accounts are not available to high income earners.

Work with your Investment advisor and tax planner to determine an optimum strategy for your unique circumstances and tolerance for risk.

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At distribution time we can convert the metal back to cash or have the physical metal mailed to us if we don't need the income.

High-income investors could enjoy the benefits of a Precious metals IRA during their working years and then gift the physical Gold and Silver to their beneficiaries after retiring (following appropriate IRS guidelines for gifting, of course).

Tax advantaged Retirement accounts allow taxpayers to save for their retirement in a tax-deferred or tax-exempt manner.

The power of compounding is leveraged inside these accounts because capital gains don’t have to be paid every year. Instead the gains accumulate and provide the opportunity for further gains.

In this brief article we’ve focused primarily on tax-deferred Retirement accounts for employees, business owners, and self-employed individuals. Tax-exempt Retirement accounts will be covered in another article.

We’ve also provided a few strategies for tax-advantaged accounts and high-income earners.

Because our specialty here at Satori Traders is the Precious metals, we included information on self-directed Gold IRAs and how they fit into a retirement savings plan.

As always, do your own due diligence before putting any hard-earned money at risk. Consult your Investment advisor, Financial planner, and tax attorney for specific guidance based on your unique circumstances and tolerance for risk.

Related links:

Satori Traders LLC

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San Diego, CA 92107

Phone: (619) 320-1900

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