Living in a gated community does give you a sense of security by keeping certain undesirable experiences from happening. But did LIFO sneak past your gate? LIFO is like a thief in the night in that it can, for years, case out the security and then when you are most vulnerable, show up with a massive surprise.
Here's how it happens. After years of success in your career and raising a family, you might sell your business and retire. You then move to the community of your choice and have all your finances organized and managed. In short, you are comfortable. Retirement seems great and you have, let’s say, $500,000 in excess funds that you just don’t need at the moment. Your desire is to conservatively invest the funds and reduce taxes as much as possible. So, you invest in a deferred annuity and over the next ten years, it grows to $1,000,000 and you have deferred all the taxes and enjoyed the deferral. Then you get a call from your only child to tell you about your granddaughter’s engagement. Everyone is thrilled and looking forward to the big event. Your daughter, then proceeds to say “Mom, Dad, we really need your help”. Since you have the security and the means you enthusiastically agree. The amount needed is $50,000. You immediately take a withdrawal from your rainy day fund and then it hits you. You had to take out $75,000 to net the desired amount. LIFO got past your security gate. You see, LIFO is an acronym for Last in, First Out. Annuities grow tax deferred but when you need the money it comes out as earnings first so Uncle Sam now takes his cut. All of sudden the light bulb turns bright as you realize that you have three more granddaughters.
I am not telling you that you shouldn’t help with the weddings or to forgo enjoying your retirement years sharing and spending time with your family, however, there is a better strategy. Usually at some point in time there will be a desire for income from assets that were set aside for the unexpected. Implementing strategies that are available to spread taxation out over many years using tax exclusion ratios may allow you to access your principal and help reduce the sting of taxation. There are now many modern strategies and products that can help you unwind deferred annuities to better meet your changing financial goals. In short, by prudently repositioning your assets you can have a better outcome. Like an additional security guard, proper advice and strategy can greatly provide for you and your family.
Scott A. Winslow ChFC
Scott Winslow, ChFC is a managing partner of Nabell Winslow Wealth Management a regional advice and investment advisory firm located in Wilmington, NC. firstname.lastname@example.org if you wish to reach out to Scott.