Income Taxation

The Situation:

Mrs. K, a renowned obstetrician in her early 40s, is a partner in an Ob/Gyn group in the Houston Medical Center. She earns in excess of $350,000/year. Her husband, Mr. K, also in his 40s, is a successful partner for a national construction firm. His annual wages are over $200,000. They also own a rental property that produces $27,000/year in rental income along with earnings on the returns from personal investments including fluctuating oil and gas royalties. With an annual household income in excess of $575,000 they are subject to a large income tax liability. They approached our firm looking to make changes to their current financial plan which they felt was not diversified in terms of asset class.

The Solution to:

While both spouses have access to a qualified retirement plan to which they make maximum contributions, they are still left with a good bit of excess income and when it comes to finding tax favorable vehicles their choices are limited, especially since they fall outside of Roth IRA guidelines. After assessing their income needs post qualified contributions and setting aside dollars for income taxes, we began looking at opportunities to tax diversify their portfolio. They had previously been pointed in the direction of municipal bonds but felt that it subjected them to unpredictable bond rates during a volatile market. After careful consideration we restructured some of their investments to be more tax favorable by moving money to an instrument with similar advantages to those with tax deferral and containing additional protection measures to bolster their portfolio in the event of an untimely death. This inevitably gave them the ability to divert an additional $50k per year over the next 25 years into a tax advantaged vehicle, allowing them to grow the money tax deferred and draw down potentially tax-free distributions over 30 years during retirement. It also gives them the opportunity to move assets freely within the remainder of their portfolio while securing a foundation for their future.

Are You Building Any Sources of Tax-Free Future Income?

Certain elements of this case study have been amended and are provided for general informational purposes only. These specific examples will not be suitable for everyone. Together we can ensure that any course of action is based on your financial needs, objective, time horizon, risk tolerance and individual situation. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

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