Planning for Tax-Efficient Retirement Income

If you expect to be in a high tax bracket in retirement, you may consider allocating your retirement assets in a variety of different types of financial products to help reduce your tax liability.

The growth potential of tax-deferred annuities may be appealing to those who have invested in safe, low-yielding strategies and are concerned about outliving their retirement savings. While contributions to a nonqualified annuity are not tax deductible, earnings accrue tax deferred. When retirees begin taking income from the annuity, they are taxed only on the interest portion of each payout.1 In contrast, distributions from a traditional IRA or 401(k) plan will be fully taxed since all contributions were made with pre-tax dollars.

Depending on which type of annuity is purchased, individuals may have a wide range of interest crediting options to select from. Also note that when the owner chooses to annuitize income payouts, he or she will receive a guaranteed (by the insurer) retirement income stream. If a lifetime income option is chosen, guaranteed payouts will be made based on life expectancy.2

Another tax-efficient option for retirement and legacy planning is whole life insurance. Some policies enable the owner to build up cash value over time which can be tapped for emergency funds or to supplement income, generally through the use of policy loans. The cash value may even be used to pay the policy’s premiums should funds begin diminishing in later retirement years.3 Please note that withdrawals or policy loans of any type may reduce available cash values and death benefits.

One of the benefits of life insurance is that it can convert taxable dollars into a much larger tax-free inheritance for beneficiaries. So rather than living conservatively in retirement for the purpose of protecting an estate for beneficiaries, an individual can earmark a certain portion of income toward a whole life policy and know exactly how much their beneficiaries will receive upon death.

Individuals may wish to consider how to reduce their tax liability in retirement by utilizing both traditional qualified retirement accounts, life insurance and/or a nonqualified annuity for tax diversification.4 Consult with your financial advisor and tax advisor about creating a financial strategy that diversifies both the types of accounts you hold as well as the assets you own.

Life insurance policies are contracts between you and an insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs. Guarantees and protections provided by insurance products including annuities are backed by the financial strength and claims-paying ability of the issuing insurer.

The content provided in this newsletter is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. 

1 BrightScope. “Build Retirement Wealth and Reduce Taxes with Tax-Diversification.” Accessed Feb. 9, 2017.

2 Fidelity. July 27, 2016. “Create income that can last a lifetime.” Accessed Feb. 9, 2017.

3 Darla Mercado. Investment News. May 12, 2013. “Life insurance as income tool.” Accessed Feb. 9, 2017.

4 Jarrett B. Topel. Nerd Wallet. Dec. 15, 2016. “Why Your Retirement Accounts Need Tax Diversification.” Accessed Dec. 31, 2016.