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New Research Shows Tax Deferral Can Increase Returns on Tax-Inefficient Assets by 100 bps—Without Increasing Risk
NEW YORK & LOUISVILLE, Ky.–(BUSINESS WIRE)– Tax deferral can improve the performance of tax-inefficient investments by as much as 100 bps, without any subsequent increase in risk, simply by locating assets between tax-deferred and taxable vehicles based on their tax-efficiency, according to a new white paper released by Jefferson National.
“The Tax-Efficient Frontier: Improving the Efficient Frontier with the Power of Tax Deferral,” written by David Lau, Chief Operating Officer of Jefferson National, expands upon primary research and a proprietary analytical model that Jefferson National developed in 2008 with Ira Weiss, Ph.D. of the University of Chicago.1 This current study evaluates the performance of a broad range of asset classes in tax-deferred vs. taxable vehicles, provides prescriptive guidelines for implementing an asset location strategy to increase returns without increasing risk, and highlights the importance of tax-efficient investing in a current climate of volatility and rising U.S. tax rates.
“Every financial advisor is familiar with the efficient frontier as a way to define the optimal balance of risk and reward for their clients; Jefferson National’s research introduces the breakthrough concept of the ‘Tax-Efficient Frontier’ where advisors can use tax-deferral to potentially increase returnsfor their clients—without increasing risk,” said Laurence Greenberg, President of Jefferson National. “As our research shows, by tax-deferring assets such as bonds, which generate ordinary income, or actively managed funds, which produce short term capital gains, advisors can create the ‘Tax-Efficient Frontier’ to help their clients earn higher returns and build more long-term wealth.”
“In this challenging environment of rising taxes and volatile markets, there will be a greater demand for a holistic approach to financial advice and greater tax-awareness added to portfolio construction,” said David Lau, the paper’s author and Jefferson National’s COO. “In an environment where every single basis point of performance counts, tax-deferral strategies which can potentially improve returns will rise in importance and the Tax-Efficient Frontier will emerge as an important new financial landmark.”
With U.S. federal debt at an all-time high, most experts believe that the Bush tax cuts will sunset this year as originally approved by Congress in 2003, with the resultant increases in 2011 pushing the tax rate for capital gains to 20% from the current 15% and the tax rate for dividends to 39.6% from 15%. In addition, the recently passed healthcare overhaul includes a 3.8% tax on investment income, scheduled for 2013. Tax increases at the state and local levels, as well as increases in estate taxes, are also anticipated.
Key findings of this white paper include:
- Locating assets in tax-deferred vs. taxable vehicles based on their tax-efficiency can increase IRR without increasing risk and add greatly to an investor’s long-term wealth.
- During recent decades of lower tax rates, the Tax-Efficient Frontier has not been a priority for many advisors. Now that the Bush tax cuts are ready to sunset and tax rates are moving back up, tax-efficient investing will become increasingly important.
- To optimize the Tax-Efficient Frontier, affluent investors may need access to more tax-deferral than allowed by the low contribution limits of 401(k)s or IRAs.
- An analysis suggests the use of these VAs can potentially increase an investor’s long-term wealth by approximately 100 bps per year without increasing risk.
The author conducted his current analysis using primary research and a proprietary model first developed by Jefferson National in 2008 to quantify the tax characteristics of a broad range of asset classes, utilizing data from the University of Chicago’s Center for Research in Security Prices as well as Ibbotson Associates. The research examined these asset classes over a 35-year period, assigning the total return for each asset class into different buckets based on tax treatment to conduct an analysis of their relative performance in a taxable vehicle versus a tax-deferred flat-insurance fee VA.
Financial professionals can receive a copy of the white paper at: http://www.jeffnat.com/thefrontier
About Jefferson National Life Insurance Company
Jefferson National Life Insurance Company offers retirement products for fee-based advisors and the clients they serve. Jefferson National believes that simple, low-cost variable annuities should be considered for a part of every American’s retirement portfolio, and we’ve made it our mission to help all Americans save more for retirement by launching Monument Advisor, the first variable annuity with a flat insurance fee. Jefferson National serves more than 50,000 customers nationwide, and is domiciled in Dallas, Texas with authority in 49 states and the District of Columbia. To reach our advisor support desk, please call 1-866-WHY-FLAT (1-866-949-3528). To learn more, please visit www.jeffnat.com.
Important Disclosure:
An investor should carefully consider the investment objectives, risks, charges and expenses of the investment before investing or sending money.The contract prospectus, and underlying fund prospectuses contain this and additional information. To obtain prospectuses, please contact your financial professional.Read it carefully before investing. The summary of product features is not intended to be all-inclusive.Restrictions may apply.The contracts have exclusions and limitations, and may not be available in all states or at all times.
Variable annuities are investments subject to market fluctuation and risk, including possible loss of principal. Your units, when you make a withdrawal or surrender, may be worth more or less than your original investment.
Variable annuities are long-term investments to help you meet retirement and other long-range goals. Withdrawal of tax-deferred accumulations are subject to ordinary income tax. Withdrawals made prior to age 59 ½ may incur a 10% IRS tax penalty. Jefferson National does not offer tax advice. Annuities are not deposits or obligations of, or guaranteed by any bank, nor are they FDIC insured.
Jefferson National does not offer Tax Advice. Please contact a tax advisor or your financial advisor.
Monument Advisor is issued by Jefferson National Life Insurance Company (Dallas, TX) and distributed by Jefferson National Securities Corporation, FINRA member. Policy series JNL-2300-1, JNL-2300-2.
1 Increasing Income through the Power of Tax Deferral, Ira Weiss, Ph.D., University of Chicago & Matthew Grove, Jefferson National, 2008.
Jefferson National
Deborah Newman, 212-220-5862
Director Corporate Communications
dnewman@jeffnat.com
Source: Jefferson National
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