Clients can leverage certain life insurance products to help prepare for life after retirement. Cash value buildup that grows tax-free while invested in the policy can be used to supplement income if needed. For instance, if the economy is in a downturn and clients need to access fundsthey can borrow against a life insurance policy. The loan can be paid down once the equity markets stabilize. If they do use this strategy, the clients need to be made aware of possible tax implications if the loan is not paid by year end. If the cash value is not needed during retirement, the money grows tax free and it passes on to the named beneficiary tax-free.
Charitable giving is another option that can reduce tax on the estate. Clients can direct retirement funds and life insurance proceeds that will not be needed to a favorite charity. This is an ideal way for clients to leave a legacy and offset taxes.
Clients can also take advantage of the various investment options unique to their country or region. For instance, Canadians are able to invest up to a specified amount of money in Tax-Free Savings Accounts (TFSA) and shelter resulting growth from taxable income. Money taken out of the account by clients or left to beneficiaries is not taxed, and the added “income” will not impact their marginal tax brackets. Clients with access to similar accounts should maximize contributions to reduce taxable income and increase savings overall.
Canadian clients can also use the housing market to redirect taxable income. Because proceeds from primary residence sales are not taxed, some home owners consider selling their home when market values increase. Although at first glance it may provide cash on hand to invest, new investments may come with associated tax implications. If clients do not need immediate access to the money, it may be better to stay in the house and let the value increase with the market. If clients truly want to downsize, they should seek guidance from an advisor for investment alternatives that will minimize tax obligations.
Educate clients about the status of their financial plan and help them monitor goals on an ongoing basis. When you meet with your clients, always discuss tax implications associated with an actions or plans and refer them to their tax accountant where necessary.
Taxes should not cross clients’ minds only once a year during tax season. Review retirement plans that take into account all their goals to make sure clients can enjoy a high-quality life after retirement and are not burdened by tax obligations that could have been avoided.
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