Tax Diversification

What is Tax Diversification?

While most people understand the importance of diversifying their investments, many overlook the powerful strategy of tax diversification, or the process of minimizing taxes annually and into the future by investing in a variety of tax-advantaged accounts. When planning for retirement, tax diversification offers a way to ensure future wealth by incorporating tax-free assets into one’s portfolio and avoiding the common pitfall of over-allocating to tax-deferred retirement plans, such as 401(k)s and traditional IRAs. Tax-free assets may include life insurance retirement plans (LIRPs), Roth IRAs, and municipal bonds. 

While traditional, tax-deferred plans play an important role in a retirement savings strategy, they are subject to market volatility and the resulting losses. Additionally, distributions are taxed at the investor’s income tax rate—which, considering that U.S. tax rates are likely to rise in the future, could significantly reduce retirement income. 

Benefits of Tax Diversification

By ensuring that an individual’s retirement portfolio includes tax-free assets, the strategy of tax diversification can be used to build wealth now and in the future. For example, properly designed and funded life insurance retirement plans may offer the following benefits:

    • The cash value of the policy enjoys tax-deferred growth over time.
    • Plans yield non-reportable tax-free income; investors may withdraw money tax-free at any age.
    • Plans are guaranteed against market losses while still providing gains, if accessed properly.
    • There are no IRS limits to how much money may be added to the plan each year.
    • High-income earners may participate.
    • Beneficiaries of the plan may receive a lump-sum, tax-free death benefit, allowing investors to ensure financial security for their loved ones in the event of untimely death. 

Life insurance retirement plans may be particularly valuable for individuals who are:

    • High-income earners.
    • Maxing out traditional retirement savings plans.
    • Committed to a long-term strategy that will result in significant future tax savings.
    • In relatively good health and between the ages of 20 and 65.

These plans may also provide an attractive option for individuals who started saving for retirement later in life, as they can be overfunded without penalty—as opposed to the strict contribution limits of 401(k)s and IRAs. 

The Power of Tax Diversification: An Example

Claiming all available tax savings opportunities in the present is an essential step toward building wealth, particularly for business owners. When invested strategically, such as through a tax-diversified retirement plan, those tax savings may yield substantial income in the future. For example, Capital Review Group worked with the owners of an architecture firm that had saved $188,000 in taxes through the Research and Development (R&D) Tax Credit. If the firm were able to repeat similar tax savings in subsequent years—for a total of approximately $1.3 million—and the firm’s owners then invested the savings in a life insurance retirement plan, they could potentially receive additional tax-free income of over $400,000 per year during retirement.

At Capital Review Group, our mission is to help our clients build current and future wealth by maximizing tax savings. Since an optimal retirement plan is defined heavily by each individual’s unique circumstances, we take a customized approach to creating and implementing tax diversification strategies. In addition, we work with CPAs and other tax and financial advisors to deliver the ultimate value for their clients: a significantly reduced tax burden. 

Will your retirement plan protect you from tax increases and provide long-lasting financial security? Capital Review Group can help you determine if a tax diversification strategy is right for you—contact us today to schedule a pro bono analysis! 

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