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Tax Diversification

Updated: Oct 8, 2020



Minimizing the impact taxes can have on your retirement savings


A Life Insurance Resource for Individuals and Families


Protecting Your Retirement Account through Tax Diversification


While paying taxes is inevitable, nobody can predict what tax rate they’ll fall into when they hit retirement. In fact, the federal income tax rate has

fluctuated from 25% in the 1930s to 89% in the 1950s and 1960s, and back to about 32% today.1

While many assume, they’ll land in a lower tax bracket when they retire, this isn’t a sure bet. For this reason, we recommend spreading investments across a more diversified tax profile to help retain more of your savings.2


The importance of tax diversification for a

strategic retirement


By spreading your money across four asset taxation categories, you can achieve tax diversification:



Protection through Whole Life


You may now have a better understanding of account taxation. But to protect your family in the event of an untimely death, life insurance can be a core component of a comprehensive financial portfolio — providing both death benefit protection and valuable living benefits, such as access to policy cash values for supplemental retirement income.


One of the most common types of life insurance, whole life is a versatile financial instrument and a tax-favored asset you can add to your retirement savings bucket. Benefits include:


• No income tax on potential cash value growth5

• No income tax on policy loans6

• Typically, no income tax on death benefits

• Can't include for determining taxation of Social Security benefits

• Withdrawals up to the amount paid in premiums are generally tax-free6


How Tax Diversification Works


Consider the following hypothetical example that shows what would happen if you take 100% of $100,000 out of a 401(k) account (after age 59½) versus taking 50% of the money out of a 401(k) and 50% out of a tax-favored asset, such as a whole life insurance policy.






UNCOMMON KNOWLEDGE



1 Tax Policy Center - Urban Institute & Brookings Institution: Historical Highest Marginal Income Tax Rates 2017; https://www.taxpolicycenter.org/ statistics/historical-highest-marginal-income-tax-rates.

2 Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

3 529 plans cannot be used for retirement unless the child does not go to school, in which case there are tax consequences.

4 Tax-Deferred planning for the Non-Qualified Deferred Compensation plans applies to the employees and is not suitable for S-corporations.

5 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

6 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is underage 59½, any taxable withdrawal may also be subject to a 10% tax penalty.

7 Taxes are due on the 401(k) account since money was contributed to that account on a pre-tax basis. However, no taxes are due on the whole life

cash value. We assume that the $50,000 is for a client in a 32% effective tax bracket.

8 Dollars contributed to life insurance premiums are not tax-deductible. Therefore, there may be more initial income tax benefits with other investment accounts because of tax deductibility. However, as stated in this piece, the account holder will pay ordinary income taxes on the dollars distributed from 401(k) accounts.

Guardian® is a registered trademark of The Guardian Life Insurance Company of America.





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