Taxes are inevitable and, with Covid-19 throwing a wrecking ball the economy, advisors need to be ready for them to increase, according to Greg DuPont, the founder of DuPont Wealth Solutions in Dublin, Ohio.
Several solutions are available to help mitigate the tax bite for those who are questioning their investments and retirement planning because of the pandemic, said DuPont, a CFP professional and estate and tax planning attorney.
“Stocks are riding a roller coaster and the recent $2 trillion stimulus bill passed by Congress potentially means larger tax bills down the road to help pay for it,” DuPont said in a statement. “We don’t know where the bottom of the stock market is, or if it will come back to its high point before the coronavirus. It could be a wild ride going forward, which is a big reason people should seek more certainty in their planning.”
The reckoning for the bailouts and stimulus packages that are being sent out will come, he said. “Personal income tax will go up in the future. Protecting yourself means being able to diversify your assets from tax exposure,” he said.
DuPont advised switching some retirement money to a Roth IRA to avoid paying taxes when rates are likely to be higher. When the investor withdraws money from the Roth IRA, there are no taxes to pay on the original amount or the earnings.
A fixed annuity or fixed-index annuity also can be advantageous because “the insurance company [selling the annuity] guarantees growth of your principal and a minimum interest rate,” DuPont said. “A fixed annuity provides a way to save money over the long term, allowing interest to accumulate tax-deferred typically at a higher rate of interest than CDs.”
He added, “A fixed-index annuity also is a tax-deferred, long-term savings option that provides principal protection in a down market. It gives you more growth potential than a fixed annuity and safety and security, unlike investments in the stock market. The annuity can periodically lock in gains so the value does not decline if the index performs negatively.”
Another product that can provide protection is a cash-value life insurance policy, he said. “An appropriately structured cash-value life insurance policy can be index-based, which gives you the potential of good growth in the savings,” DuPont said. “If you have that growing for a reasonable amount of time, you can get that cash value out tax-free to take care of things during your lifetime. It could have a higher rate of return than in a bank and it grows tax-deferred.”
The advisor warned against too much reliance on bonds because “they are not paying anything now and the ones that have decent yield are at risk of cratering on you” in the future, he said.
“These are highly uncertain times, and planning for as much certainty as you can is crucial,” DuPont concluded. “This crisis does provide an opportunity for Americans to take a deep look at their retirement plans and be better prepared for unanticipated emergencies, while also protecting their long-term security.”