Did you know that investment accounts are categorized into two buckets called “qualified” and “non-qualified” accounts?
Accounts deemed “qualified” are eligible for fabulous benefits, such as tax deductions and tax-deferred or tax-free growth. Two common examples are IRAs and Roth IRAs.* The advantages are so great that these accounts must have a catch, and the one major drawback is that annual contributions are limited to just $6,000 per year.**
This leads us to “non-qualified” accounts, which on their own do not provide a tax advantage wrapper. However, one major advantage is that there are no limits to how much you can contribute to non-qualified accounts each year. But what if you could have it both ways? The tax advantages of qualified accounts and the ability to make very large contributions to non-qualified accounts. Well, there is.
There are tools that have existed for hundreds of years that provide tax advantages similar to an IRA or Roth. Those tools are called annuities and life insurance. Up until recently, it often was not advisable to use either tool for investing as the complexity and expenses of the tools outweighed the tax advantages. However, recent innovations have stripped out much of the costs, such as commissions and investment fees, and complexity, such as surrender periods and riders.
Now the tax advantages of annuities and life insurance can effectively be wrapped around the investment flexibility of non-qualified accounts.*** This allows you to contribute hundreds of thousands or millions of dollars to tax advantage accounts at one time. Not only can these tools reduce your tax bill significantly each year, retirement and other benefits impacted by your income could be enhanced too. Namely Medicare and Obamacare premiums and taxes on your Social Security benefits can be greatly reduced and tax credits can be greatly increased.
If you’re already maxing out your retirement accounts each year, such as IRAs and 401ks or have come into money through a gift inheritance or business sale or you have large amounts of money in bank accounts, brokerage accounts or trusts, contact a Boulay wealth management advisor to learn more about how these powerful tools can help you migrate and shelter your wealth and how they could fit within your financial plan.
*IRA contributions may receive a tax deduction. Roth contributions
do not.
**Employer provided retirement plans, such as SEP IRAs and
401(k)s, may provide additional capacity to contribute to qualified accounts
through higher contribution limits.
*** Annuities and life insurance each have their own unique characteristics, which may be different from other non-qualified accounts, such as the method of accessing basis, character of income (ordinary vs. qualified), taxation to beneficiaries, etc. Speak to your financial advisor to learn more.