|
Thursday, May 2, 2024
 |
Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 8 - Convert the Taxable into the Tax Free
|
Case:
Jeanne Henry, 88, is a very concerned American. Having grown up during the Great Depression, Jeanne developed certain attitudes toward money and savings. As a result, she saved consistently and conservatively during her entire life. Despite her financial planner's suggestions, Jeanne put little, if any, of her savings into the stock market. Consequently, Jeanne avoided the loss in retirement savings that some Americans experienced during the past year.
However, the decreasing interest rates have caused Jeanne's CD and MMA interest rate returns to dwindle. Currently, Jeanne is earning a mere 1.5% on her savings. While pleased that she preserved the principal of her accounts, Jeanne's yearly retirement income has dropped off significantly and this worries her greatly. She wants to increase her income substantially, but does not want to expose herself to greater risk or to more income taxation.
Question:
How can Jeanne increase her return on investment without exposure to fluctuations in the markets and without increasing her taxable income each year?
Solution:
Jeanne should consider using some of her CD and MMA accounts to fund a charitable gift annuity (CGA). Currently, she pays ordinary income tax on all earnings from her savings accounts, which is returning approximately 1.5%. However, if she funded a CGA, Jeanne would receive an 8.9% annuity rate.
Moreover, Jeanne's taxable income would not increase at all! Each year, Jeanne would still receive about 18.7% taxable income. The remaining 81.3% would not be taxable income because it would be treated as a return of principal. Therefore, Jeanne would pay ordinary income tax on nearly 16% of the payout and the over 84% would not be subject to any tax whatsoever.
This result is possible when using the ACGA rates and an AFR of 3%. Often, the highest AFR is selected because it will produce the highest charitable deduction. However, when a donor does not itemize or desires more tax-free income, then the lowest AFR should be selected. In this case, Jeanne prefers greater tax-free income, so a large charitable deduction is not important and the lowest AFR is best for her.
Because Jeanne chose a strong, century-old charity, Jeanne has exposed herself to very little risk. CGAs are backed by the full faith and credit of the issuing charity. Therefore, as long as the charity remains financially viable, Jeanne will continue to receive a fixed payout for the rest of her life.
Jeanne loves the increase in her income, the tax-free portion of each payout and the certainty of a payment each year. Thus, she transferred about 20% of her saving accounts in exchange for a CGA. In the end, Jeanne accomplished all of her goals while still adhering to her deeply-rooted beliefs regarding savings and money.
|
|
|
|
