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Tax Deferral Key to Generating Income, Saving More

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Tax deferral is vital for accumulating more savings and generating more retirement income, according to a new white paper released by Jefferson National, and the key is using a low-cost, no-load tax-deferred investment platform such as a no-load, flat-insurance fee variable annuity after maxing out contributions to other vehicles such as IRAs and 401(k)s.

“Many investors assume it takes several decades of tax-deferred growth to produce after-tax returns that are higher than those produced by a taxable account,” says Ira Weiss, of the University of Chicago, who co-authored the paper with Jefferson National’s Matthew Grove. “However, depending on the mix of asset classes and trading strategy used, it can take anywhere from 13 years to as little as one year for a tax-deferred portfolio to outperform a taxable portfolio. Our research concludes that advisors should consider moving taxable accounts earmarked for long-term accumulation into a low-cost, no-load tax-deferred investment platform to enhance their clients’ after-tax outcome.”

According to the white paper, typical mutual fund investors with a moderate risk profile are better off in a flat-fee variable annuity, rather than a taxable account, if they accumulate savings for more than 10 years before taking withdrawals to generate a retirement income. Conservative investors are better off in a flat-fee variable annuity after four years of accumulation, and aggressive investors will do better after 13 years.

Although some advisors may prefer to locate their clients’ entire retirement portfolios in a flat-fee variable annuity, clients can earn higher after-tax returns if advisors practice asset location by locating tax-inefficient asset classes in a flat-fee variable annuity and tax-efficient asset classes in a taxable account.


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