Taxes can take a big bite out of an investment portfolio. Over time income withheld for taxes can reduce returns and significantly impact an investor's long-term investment strategy.
The more money you earn, the more you pay in taxes. Fair? Maybe, maybe not. What's certain is that there is no indication of tax rates getting any lower and a good chance that they will go up in the future. And when you add in increasing nonqualified investments that kick off dividends and capital gains, you could be losing investment earnings to taxes. Most people are not even aware that Mutual Funds can kick off phantom capital gains. Over looking the role taxes play in your long term investing strategy can derail your success.
When preparing for retirement, investors want their investments to grow so they can draw an income from it when they stop working. The standard is to contribute to a company 401K or IRA and then anything extra go into a taxable non-retirement account. Making a contribution into a ROTH IRA is a great choice, but more and more workers are getting phased out due to income limitations.
So how do we partially take taxes out of the equation? Turning to tax-deferred vehicles is a way to avoid taxes today and control your income stream in the future. In a study by TIAA-CREF, 84 percent of the respondents claim that receiving a monthly paycheck during retirement is important to them; yet only 14 percent of Americans have purchased a tax deferred annuity. An annuity can keep you invested in the market while limiting the tax exposure. By keeping more assets invested over time, helps your money work smarter for the long run.
Market environments, tax laws, and interest rates will always change, but easing the tax bite is a great way to provide more success to your retirement goal.