Darius hosted our friend Scott Diddel on this month’s Pro to Pro, where they explored Scott’s comprehensive presentation on understanding the basics of how to allocate assets from a tax-advantaged perspective.
If you missed the interview, here are the three most important takeaways from Scott’s presentation that can help you plan for your financial future:
1. How Do Inflation And Taxes Impact Long-Term Investments?
The impact of inflation and taxes on long-term investments is staggering.
A $1 investment in large-cap stocks from 1926 would have grown to $2,533 today without the impact of inflation and taxes. When taking into account the impact of taxes alone, the amount is reduced to $672. When both taxes and inflation are considered, the value plummets to $48. This represents a shocking 98% decrease from the nominal return to the actual return in your bank account.
Allowing your money to sit idly exposes it to the erosive effects of taxes and inflation. As an investor, you should actively strategize to implement tax-efficient strategies and preserve your wealth over time.
2. What Are The Tax Implications of Different Investment Vehicles?
Investment vehicles are categorized based on their tax treatment: “Tax Later,” “Tax Now,” and “Tax Once and Never Again.”
Qualified plans like 401(k)s and IRAs fall under “Tax Later,” offering tax-deferred growth until you withdraw the investment. “Tax Now” includes outside investments, such as stocks and bonds, which generate taxable income annually. Lastly, the “Tax Once/Never Again” category features options like Life Insurance Retirement Plans (LIRPs), providing tax-free growth and distributions.
Understanding these distinctions is crucial for optimizing your investment strategy. Each category offers unique advantages, allowing investors to tailor their portfolios to their specific financial goals and tax situations.
3. How Can A Life Insurance Retirement Plan (LIRP) Enhance Retirement Distributions?
A Life Insurance Retirement Plan (LIRP) can significantly boost after-tax retirement income.
In a scenario without a LIRP, a desired $250,000 distribution results in only $170,000 after taxes. By incorporating a LIRP, the same distribution yields $208,000 after taxes. This $38,000 annual difference amounts to an additional $760,000 over a 20-year period.
LIRPs achieve this through tax-free growth and distributions, complementing traditional retirement accounts and outside investments. This powerful tool offers a tax-efficient way to supplement retirement income, helping you earn additional income in your retirement years.
That’s a wrap!
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If you don’t change your process, how can you expect to get better results?
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