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 You say that you have your savings compounding in after-tax investments and getting a return. Great!
But have you ever considered the opportunity lost on the taxes that you’re paying on the return you’re receiving from your investments?
Most of us never do. We put our money into an investment and dutifully let it accrue in value, but in order to continue to let it grow, we inevitably incur "out of pocket" expenses each year to cover the taxes entailed with our investment growth.
The problem this creates is that as our investment returns compound, we end up with a "compounding tax" dilemma.
Although you’re receiving a return, have you ever considered the "opportunity loss" on the money you are paying in taxes? Have you ever thought of saving those tax payments and reinvesting them in a tax-favored environment?
For example,
Let’s say you invest $100,000 into an investment for 25 years that the taxable return will be 8% to you each year and that you fall within the 33.75% tax bracket (Federal and State).
| Year |
BOY Balance |
Return |
EOY Balance |
Compound Tax |
| 1 |
$100,000 |
$8,000 |
$108,000 |
$2,700 |
| 2 |
$108,000 |
$8,640 |
$116,640 |
$2,916 |
| 3 |
$116,640 |
$9,331 |
$125,971 |
$3,149 |
| 4 |
$125,971 |
$10,078 |
$136,049 |
$3,401 |
| 5 |
$136,049 |
$10,884 |
$146,933 |
$3,673 |
| 6 |
$146,933 |
$11,755 |
$158,687 |
$3,967 |
| 7 |
$158,687 |
$12,695 |
$171,382 |
$4,285 |
| 8 |
$171,382 |
$13,711 |
$185,093 |
$4,627 |
| 9 |
$185,093 |
$14,807 |
$199,900 |
$4,998 |
| 10 |
$199,900 |
$15,992 |
$215,892 |
$5,397 |
| 11 |
$215,892 |
$17,271 |
$233,164 |
$5,829 |
| 12 |
$233,164 |
$18,653 |
$251,817 |
$6,295 |
| 13 |
$251,817 |
$20,145 |
$271,962 |
$6,799 |
| 14 |
$271,962 |
$21,757 |
$293,719 |
$7,343 |
| 15 |
$293,719 |
$23,498 |
$317,217 |
$7,930 |
| 16 |
$317,217 |
$25,377 |
$342,594 |
$8,565 |
| 17 |
$342,594 |
$27,408 |
$370,002 |
$9,250 |
| 18 |
$370,002 |
$29,600 |
$399,602 |
$9,990 |
| 19 |
$399,602 |
$31,968 |
$431,570 |
$10,789 |
| 20 |
$431,570 |
$34,526 |
$466,096 |
$11,652 |
| 21 |
$466,096 |
$37,288 |
$503,383 |
$12,585 |
| 22 |
$503,383 |
$40,271 |
$543,654 |
$13,591 |
| 23 |
$543,654 |
$43,492 |
$587,146 |
$14,679 |
| 24 |
$587,146 |
$46,972 |
$634,118 |
$15,853 |
| 25 |
$634,118 |
$50,729 |
$684,848 |
$17,121 |
| Total: |
$197,384 |
| For illustrative purposes only. Not indicative of individual results. Assumes reinvestment of dividends and no effects of fees and taxes. |
Although your investment has grown to $684,848, you have paid $197,384 in taxes. In other words, you now have $684,848 in your account, but it cost you $197,384 in taxes to get there.
What if you could level your tax strategy and let the compounding tax grow within another tax-favored investment.
| Leveling Tax |
Compounding Tax |
Tax Savings |
Tax Savings at Opportunity |
| $2,700 |
$2,700 |
$0.00 |
$0.00 |
| $2,700 |
$2,916 |
$216 |
$229 |
| $2,700 |
$3,149 |
$449 |
$719 |
| $2,700 |
$3,401 |
$701 |
$1,505 |
| $2,700 |
$3,673 |
$973 |
$2,626 |
| $2,700 |
$3,967 |
$1,267 |
$4,127 |
| $2,700 |
$4,285 |
$1,585 |
$6,055 |
| $2,700 |
$4,627 |
$1,927 |
$8,461 |
| $2,700 |
$4,998 |
$2,298 |
$11,404 |
| $2,700 |
$5,397 |
$2,697 |
$14,947 |
| $2,700 |
$5,829 |
$3,129 |
$19,161 |
| $2,700 |
$6,295 |
$3,595 |
$24,121 |
| $2,700 |
$6,799 |
$4,099 |
$29,913 |
| $2,700 |
$7,343 |
$4,643 |
$36,630 |
| $2,700 |
$7,930 |
$5,230 |
$44,371 |
| $2,700 |
$8,565 |
$5,865 |
$53,251 |
| $2,700 |
$9,250 |
$6,550 |
$63,389 |
| $2,700 |
$9,990 |
$7,290 |
$74,919 |
| $2,700 |
$10,789 |
$8,059 |
$87,989 |
| $2,700 |
$11,652 |
$8,952 |
$102,757 |
| $2,700 |
$12,585 |
$9,885 |
$119,401 |
| $2,700 |
$13,591 |
$10,891 |
$138,109 |
| $2,700 |
$14,679 |
$11,979 |
$159,094 |
| $2,700 |
$15,853 |
$13,153 |
$182,582 |
| $2,700 |
$17,121 |
$14,421 |
$208,823 |
| For illustrative purposes only. Not indicative of individual results. Assumes reinvestment of dividends and no effects of fees and taxes. |
For example,
Let’s say you invest $100,000 into an investment for 25 years in which the taxable return will be 8% to you each year and that you fall within the 33.75% tax bracket.
However, this time we’re going to take your interest return completely out of your initial investment and re-invest it within a life insurance policy (now we are keeping the bat, but changing the swing), that itself will produce a tax-favored return.
| Year |
BOY Balance |
Return |
Tax |
| 1 |
$100,000 |
$8,000 |
$2,700 |
| 2 |
$100,000 |
$8,000 |
$2,700 |
| 3 |
$100,000 |
$8,000 |
$2,700 |
| 4 |
$100,000 |
$8,000 |
$2,700 |
| 5 |
$100,000 |
$8,000 |
$2,700 |
| 6 |
$100,000 |
$8,000 |
$2,700 |
| 7 |
$100,000 |
$8,000 |
$2,700 |
| 8 |
$100,000 |
$8,000 |
$2,700 |
| 9 |
$100,000 |
$8,000 |
$2,700 |
| 10 |
$100,000 |
$8,000 |
$2,700 |
| 11 |
$100,000 |
$8,000 |
$2,700 |
| 12 |
$100,000 |
$8,000 |
$2,700 |
| 13 |
$100,000 |
$8,000 |
$2,700 |
| 14 |
$100,000 |
$8,000 |
$2,700 |
| 15 |
$100,000 |
$8,000 |
$2,700 |
| 16 |
$100,000 |
$8,000 |
$2,700 |
| 17 |
$100,000 |
$8,000 |
$2,700 |
| 18 |
$100,000 |
$8,000 |
$2,700 |
| 19 |
$100,000 |
$8,000 |
$2,700 |
| 20 |
$100,000 |
$8,000 |
$2,700 |
| 21 |
$100,000 |
$8,000 |
$2,700 |
| 22 |
$100,000 |
$8,000 |
$2,700 |
| 23 |
$100,000 |
$8,000 |
$2,700 |
| 24 |
$100,000 |
$8,000 |
$2,700 |
| 25 |
$100,000 |
$8,000 |
$2,700 |
| Total Used for Life Ins: |
$200,000 |
| For illustrative purposes only. Not indicative of individual results. Assumes reinvestment of dividends and no effects of fees and taxes. |
In this case, we are taking your $8,000 return each year and investing it within a life insurance policy. As such, we have capped your tax at only $2,700 each year and eliminated your compounding tax issue.
Now your tax on the initial investment has been cut to $67,500 (compared to $197,384 when you let it compound). And your $8,000 interest returns for 25 years ($200,000) have purchased a life insurance policy that has a cash value of $315,339 at the end of 25 years. This policy will also have a net death benefit of $319,940 at the end of 25 years.
As such, you now have $100,000 within your initial investment (which is compounding within a tax favored investment environment), and you also have $315,339 of cash value within your life insurance policy, which is compounding within a tax-favored investment environment. Plus, you’ve saved $208,823 in taxes.
The original $100,000 plus the insurance cash value of $315,339 plus the tax savings of $208,823 to total $624,162...all with no out of pocket costs!
The velocity has just begun! By continuing to apply the new level of thinking from the three stories, Kiwi vs. Eagle, How Banks Make Money and Bat vs. Swing you will understand how to recapture your term insurance premiums, velocitize your cash value, etc...
When it’s all said and done, it will be over $1,000,000 versus $684,848.
Not only do you have more money, but now you also have a $319,940 death benefit to take care of The Retirement Myth™.
Call us for a preview and complete details. We offer an in-depth presentation of all of our strategies.
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8 Sheraton Drive • Altoona, PA 16601
Phone: (814)940-8322 Toll Free: (888)735-8037 Fax: (814)940-8323 Email: info@equitynorth.com
Securities Offered Through SMH (Sanders Morris Harris) Capital, Inc., Member FINRA/SIPC
Advisory Services Offered Through SMH (Sanders Morris Harris) Capital, Inc., A SEC Registered Investment Advisor.
Equity Concepts North and SMH (Sanders Morris Harris) Capital, Inc. are not affiliated companies.
This site has been published for residents of AR, CO, FL, MD, MN, NY, PA, and VA. All information herein has been prepared solely for informational purposes,
and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular strategy. |
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