i need help on my investing. my wife and i together save and invest a little more than $100,000 per year. we max out our 401k's and the rest so far has been put into taxable acounts and mostly index funds. my financial planner for the past two years has been pushing for the variable life insurance plan and really sells the tax benefits of it. i'm starting to agree with him especially with the change in the nation's president and the possible long term/short term capital gains tax changes that may follow. i've searched this forum for info on the VUL insurance threads and it doesn't seem to endorse these investment vehicles. my fp recognizes that these can be bad investments but with the amount of money that we are trying to invest, the best way to avoid the potential taxes is to use the variable life policy. i've always been skeptical of these policies, but if i'm saving for the long term and want to avoid as much taxes as possible, it seems that it is about the only option. any thoughts? thanks in advance.
investing tax help
- Thread starter rflach1
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SteveL
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Risks in VUL
1. Does your FP get a commission? Is your FP an agent for the insurance company? Even if not an agent, it is common for an agent to make a payment under the table to FP's who refer clients to them.
2. How much ins are you required to buy? Normally, this is annual renewable term insurance. It can be cheap when you buy, but since the rate goes up every year you own it, when you get to be 70 it can be very expensive.
3. How much are the annual fees? Often, these are 2% per year for investment management, plus a M&E charge(ins co exp fee) of .91%.
4. Tax laws don't favor. see http://www.consumerfed.org/pdfs/VariableUniversalLife2007ReportPackage.pdf
For those who have more to invest than can is allowed in a 401k, a good approach is to just open a regular account at a broker, or at Vanguard, and put the money to work. Your retirement will come all the sooner.
1. Does your FP get a commission? Is your FP an agent for the insurance company? Even if not an agent, it is common for an agent to make a payment under the table to FP's who refer clients to them.
2. How much ins are you required to buy? Normally, this is annual renewable term insurance. It can be cheap when you buy, but since the rate goes up every year you own it, when you get to be 70 it can be very expensive.
3. How much are the annual fees? Often, these are 2% per year for investment management, plus a M&E charge(ins co exp fee) of .91%.
4. Tax laws don't favor. see http://www.consumerfed.org/pdfs/VariableUniversalLife2007ReportPackage.pdf
For those who have more to invest than can is allowed in a 401k, a good approach is to just open a regular account at a broker, or at Vanguard, and put the money to work. Your retirement will come all the sooner.
FinanceDude
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I have YET to see a place where variable life is a GOOD DEAL for the investor. Usually such policies are used where LARGE estates are involved ($10 million plus) as a wealth transfer vehicle. The commissions are front-loaded to the agent, so the very little actually goes into "investments" in the first several years.
Buy a big chunk of term if you're light on life insurance. Other than that, stay away........
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Calling youbet:
we may have a candidate for the "understatement of the day/week/month/year award" here!
-ERD50
ziggy29
Moderator Emeritus
I don't care for VUL at all. I think even a deferred annuity (!!!) from a low-cost provider might be a better choice at least for high-income, high net-worth individuals who have maxed out all other tax-deferred options like 401Ks, 403Bs, 457s and IRAs. But even those are not good for *most* people unless you fit the profile for whom they can work.
FinanceDude
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VUL's are a GOOD DEAL for the insurance companies, they create "sticky money" that helps smooth out their payment of claims........
travelover
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My advice for the OP would be to go over to the Bogleheads forum for advice. Bogleheads Investing Advice and Info
Another thought is that you can invest in non dividend paying stocks in a taxable account (think Berkshire Hathaway). No taxes until you sell and then at capital gains rates vs marginal rate.
Another thought is that you can invest in non dividend paying stocks in a taxable account (think Berkshire Hathaway). No taxes until you sell and then at capital gains rates vs marginal rate.
LOL!
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I will second the suggestion to go over to the Bogleheads forum for some advice. They have helped me to reduce taxes on my investments to practically zero ... all without VUL or annuities or other high-fee gimmicks.
One can be extremely tax efficient in taxable accounts just by investing in something like VTI or VEU. Sure, you will have to pay taxes on dividends on these funds, but you get a special tax rate. Also you pay no taxes on unrealized cap gains.
If you need more fixed income in your taxable accounts, then tax exempt muni bond funds are probably the way I would go. I use tax exempt money market funds now. However, I have filled up my tax-advantaged accounts with tax inefficient investments such as bonds, REITs and small cap value. Indeed, if you have ANY tax efficient investments in your tax-advantaged accounts, then you have more room in your tax-advantaged accounts for tax inefficient investments simply by moving the tax efficient investments out of the tax advantaged accounts.
One can be extremely tax efficient in taxable accounts just by investing in something like VTI or VEU. Sure, you will have to pay taxes on dividends on these funds, but you get a special tax rate. Also you pay no taxes on unrealized cap gains.
If you need more fixed income in your taxable accounts, then tax exempt muni bond funds are probably the way I would go. I use tax exempt money market funds now. However, I have filled up my tax-advantaged accounts with tax inefficient investments such as bonds, REITs and small cap value. Indeed, if you have ANY tax efficient investments in your tax-advantaged accounts, then you have more room in your tax-advantaged accounts for tax inefficient investments simply by moving the tax efficient investments out of the tax advantaged accounts.
jIMOh
Thinks s/he gets paid by the post
I would suggest looking at muni bonds in the taxable accounts.
I would also suggest looking at paying down a mortgage, investments with low yields (total market index for example), and possibly investing in real estate for other tax savings.
One comment I make often is what is most tax efficient going in is LEAST tax efficient coming out.
For example your best tax efficiency investing now is:
401k (money goes in pre-tax, grows tax deferred)
Roth (money goes in post tax, grows tax deferred)
Taxable account (money goes in post-tax, growth is taxed when gains are realized and dividends are also taxed at time of distribution).
If you look at the money coming out, the most beneficial is:
1) Roth (money comes out tax free)
2) taxable accounts (the rates you pay might be 5% or 15%
3) 401k (the rates you pay are currently 10%-15%-25%-28%-33%-35%)
2) and 3) do not include state taxes
If you look at how money comes out, you might see you want the tax inefficiency now. If you are in 28-33-35% federal tax brackets now, but expect to be in 15% bracket when you retire, you might want to consult a tax advisor (you want someone who knows taxes first and investments second). If your investment advisor (the one which sounds like he is selling you something now) could not tell you what every line means on the 1040 long form, he is not qualified to give tax advice (IMO).
The longer you w*rk, the more likely the "life insurance" looks OK as an investment.
The shorter you w*rk, the more likely using taxable accounts is going to be a better move. This is because the compounding aspect of your returns does not get taxed as long. I put over/unser on 10-15 years (if money is going to be invested for 15 or more years, get the compounding tax deferred MAYBE, if you only have 10 years until retirement, the probability that compounding in a taxable account increases your tax rate is minimal). This is general advice/commentary, your situation might be different.
I would also suggest looking at paying down a mortgage, investments with low yields (total market index for example), and possibly investing in real estate for other tax savings.
One comment I make often is what is most tax efficient going in is LEAST tax efficient coming out.
For example your best tax efficiency investing now is:
401k (money goes in pre-tax, grows tax deferred)
Roth (money goes in post tax, grows tax deferred)
Taxable account (money goes in post-tax, growth is taxed when gains are realized and dividends are also taxed at time of distribution).
If you look at the money coming out, the most beneficial is:
1) Roth (money comes out tax free)
2) taxable accounts (the rates you pay might be 5% or 15%
3) 401k (the rates you pay are currently 10%-15%-25%-28%-33%-35%)
2) and 3) do not include state taxes
If you look at how money comes out, you might see you want the tax inefficiency now. If you are in 28-33-35% federal tax brackets now, but expect to be in 15% bracket when you retire, you might want to consult a tax advisor (you want someone who knows taxes first and investments second). If your investment advisor (the one which sounds like he is selling you something now) could not tell you what every line means on the 1040 long form, he is not qualified to give tax advice (IMO).
The longer you w*rk, the more likely the "life insurance" looks OK as an investment.
The shorter you w*rk, the more likely using taxable accounts is going to be a better move. This is because the compounding aspect of your returns does not get taxed as long. I put over/unser on 10-15 years (if money is going to be invested for 15 or more years, get the compounding tax deferred MAYBE, if you only have 10 years until retirement, the probability that compounding in a taxable account increases your tax rate is minimal). This is general advice/commentary, your situation might be different.
FinanceDude
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thanks for the advice, my taxes are the 32% range and i plan on saving for another 20 years before retirement.
jIMOh
Thinks s/he gets paid by the post
20 years to retire...
saving 100k+ per year...
would be $2 M if you put this in CDs...
How much are you expecting to need to retire?
I think you need a more complete analysis:
1) What are your current expenses?
2) have you ran firecalc to see if you need 25X, 33X or similar amount of expenses to retire on?
3) how do you see expenses changing when you retire?
4) how much do you have saved for retirement now?
5) what types of accounts are these in? 401k-Roth-other
6) any other special considerations (kids, college, other)?
My hunch is the analysis will show you need around 30X expenses or 25X expenses, and you can retire in a lot less than 20 years.
saving 100k+ per year...
would be $2 M if you put this in CDs...
How much are you expecting to need to retire?
I think you need a more complete analysis:
1) What are your current expenses?
2) have you ran firecalc to see if you need 25X, 33X or similar amount of expenses to retire on?
3) how do you see expenses changing when you retire?
4) how much do you have saved for retirement now?
5) what types of accounts are these in? 401k-Roth-other
6) any other special considerations (kids, college, other)?
My hunch is the analysis will show you need around 30X expenses or 25X expenses, and you can retire in a lot less than 20 years.
