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It's never too early to think about tax season, even though many of us consider it to be the least wonderful time of the year. Increasingly savvy investors are taking advantage of investments that allow them to defer a portion of their tax burdens.
If you’ve exhausted your other tax deferral options – contributed the maximum allowed by law to your 401(k) or IRA – it may be time to consider life insurance or an annuity. Products such as variable annuities and variable universal life policies all offer distinct tax deferral benefits, according to Patty Reiners, assistant vice president of marketing for Ameritas Direct, a division of Ameritas Life Insurance Corp.
“For investors who have taken full advantage of other tax-deferred investment options, variable annuities and life insurance is a good place to put additional investment dollars,” Reiners says. “A lot of information, products and options can be found online. Investors should be sure to seek out ‘no-load’ products that don’t charge sales commissions, fees or overhead.”
Some tax-deferred investment options include:
Variable Annuities
Provided by insurance companies, this product allows the investor to participate in a range of investment options advised by well-known mutual fund companies. Taxes are deferred on the income generated by these investments. Trades within the investment are not taxed either, Reiners says.
“A variable annuity can help you grow your money on a tax deferred basis,” Reiners says. “Plus, if you invest in a no load annuity it is immediately liquid. You can put money in today and withdraw it tomorrow. You pay no taxes on the growth until you withdraw it as income, and then it is taxed as ordinary income.” IRS penalties could apply for withdrawals before age 59 1/2.
By deferring taxes on current growth, the investment has the potential to grow faster because there is potentially a greater, constantly increasing amount of money working for you generating more money.
Further benefits of variable annuities include the ability to make unlimited contributions, and a guaranteed death benefit for your beneficiaries in most annuities. If the annuity purchaser dies, beneficiaries receive at least the amount of the original investment, even if the actual value of the annuity has declined. And of course, if the annuity has gained in value, the beneficiaries receive the higher amount.
Variable Universal Life Insurance
Like all life insurance products, variable universal life insurance provides lifelong insurance protection and funds long-term financial goals. Additionally, it can be funded in a way that allows you to invest a portion of your premium in tax-deferred investments, just like a variable annuity, Reiners says.
Properly structured, the death benefit is income tax free to the beneficiary without the delays and expense of probate.
“You can also structure the product to allow you to withdraw from the policy,” she says.
“The withdrawal taps your contribution first and the investment income last. And since you’ve already paid taxes on your contribution, you are not taxed again when you withdraw it. You pay no taxes on the investment until you withdraw the income.” Withdrawals will reduce death benefit and could cause the policy to lapse.
For more information on the tax benefits of life insurance and variable annuities, or to learn more about no-load products, go to www.ameritasdirect.com, or call (800) 552-3553. Ameritas Direct’s customer service team is salaried, not commissioned, so their focus is on helping you find the best product for your needs. Variable life insurance and variable annuities involve investment risk, including possible loss of principal. - ARA |
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