Wealth Protection Expertise SM Let s Talk Taxes Managing taxes to keep your money working efficiently Not a deposit Not FDIC-insured May go down in value Not insured by any federal government agency Not guaranteed by any bank or savings association Insurance products issued by: The Lincoln National Life Insurance Company Lincoln Life & Annuity Company of New York Client Guide 879495
Taxes A closer look Understanding tax rules can be challenging. Understanding them as they relate to your retirement may seem downright impossible, especially when you consider the uncertain and changing tax environment of late. It is during such times that planning is more important than ever. Tax provision If taxable income is over 2014 Top tax rate Single Joint Income tax $406,750 $457,600 39.6% Medicare payroll tax: additional tax on earned income $200,000 $250,000 0.90% Capital gains: Long-term capital gains and qualified dividends $400,000 $450,000 20% Unearned Income Medicare Contribution Tax (UIMCT): applies to realized investment income and gains $200,000 $250,000 3.80% Itemized deductions: Reduces Schedule A deductions by up to 80% $254,200 $305,050 Reduce by 3% of every dollar above the thresholds Personal exemptions: Phaseout $3,950/personal tax exemption $254,200 $305,050 Full phaseout at $376,700/$427,550 2
Retirement Planning What s on your mind? Perhaps it shouldn t come as a surprise that taxes can have a substantial impact on the retirement experience, but for many it does. If you re like most people planning for retirement, you understand the importance of building and preserving your retirement savings. By saving and investing as much as possible, you can help ensure a financially secure retirement. Right? Unfortunately, such a plan can fall short. One of the most overlooked risks to your retirement security is the role taxes play in eroding your wealth. In view of that, we commissioned a survey to better understand the intersection of taxes and retirement planning. Here s what we learned from the 2013 Expense Challenges of Age 62-75 Retirees survey*: When asked what they thought (prior to retiring) their top expenses would be once they retired, participants answered: 1. Home/mortgage 2. Healthcare 3. Travel/leisure Yet, when asked what their top expenses actually are, they said: 1040 1. Home/mortgage 2. Travel/leisure 3. Taxes 36 % 33 % Reported that taxes were a larger expense than they had anticipated Said knowing what they now know, they would have done a better job of tax planning for retirement * Over 750 individuals responded to an online survey developed by LFG and the Spectrem Group, which conducted the survey from October 1 through October 9, 2013. The LFG-sponsored research surveyed retirees between the ages of 62 and 75 with annual household incomes greater than $100,000. 3
Retirement Planning Don t underestimate the impact of taxes As part of the study, we asked participants what actions they took to minimize taxes: Itemized deductions 1040 35 % No other action came close. Get your tax act together: In the face of uncertain and ever-changing tax policies, you ll want to consider more varied and sophisticated tax minimization strategies. Despite the significant number of retirees who admit to overlooking taxes in their retirement planning, taxes and their impact on retirement savings is one of the top concerns among respondents exceeding concerns about health and generating enough income to maintain current lifestyle. Having enough money to live throughout my retirement Generating enough annual income to maintain my current lifestyle 49 % 67 % 53 % Taxes and their impact on my retirement savings 4
Stocks, bonds and T-bills 1926 201212 Taxes can take a big bite out of an investment portfolio. This image illustrates the hypothetical growth of a $1 investment in traditional asset classes before and after taxes from January 1, 1926 to December 31, 2012. Over time, income withheld for taxes can reduce returns and significantly impact an investor s long-term investment strategy. $1,000 $100 Compound annual return Large-cap stocks 9.8% Stocks after taxes 7.8% Government bonds 5.7% Bonds after taxes 3.7% T-bills (cash) 3.5% T-bills (cash) after taxes 2.2% $3,533 $712.03 (after taxes) $123 $10 $23.01 (after taxes) $21 $6.66 (after taxes) $1 $0.10 1926 1936 1946 1956 1966 1976 1986 1996 2006 2012 Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926 with taxes paid monthly. Income is taxed at the appropriate federal income tax rate as it occurs. It is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning the equivalent of $110,000 in 2010 dollars every year. When realized, capital gains are calculated assuming the appropriate capital gains rates. The holding period for capital gains tax calculation is assumed to be five years for stocks, while dividends were taxed when earned and reinvested. Government bonds were held until replaced in the index with capital gains realized at the time of sale and reinvested. No state income taxes are included. In this illustration, stocks are represented by the Standard & Poor s 90 Index from 1926 through February 1957, and the S&P 500 Index thereafter. Bonds are represented by the 20-year U.S. government bond index, and Treasury bills are represented by the 30-Day U.S. Treasury bill. Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks and municipal bonds are not guaranteed. Stocks have been more volatile than the other asset classes. Municipal bonds may be subject to the alternative minimum tax (AMT) and state or local taxes, and federal taxes would apply to any capital gains distributions. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Assumes reinvestment of income and no transaction costs. 2013 Morningstar. All Rights Reserved. 3/1/2013 5
Retirement Planning Retirement planning strategies aimed at minimizing your tax exposure To help manage the impact of taxes on your retirement income, capital gains, long-term care assets and your estate, you need a tax-smart strategy. Talk to your financial advisor about ways to mitigate the impact of taxes and how Lincoln Financial products and strategies may help keep your money working efficiently. Annuities Designed to help grow and protect assets as you save for retirement, a Lincoln annuity offers: Tax-deferred growth potential Tax-free exchanges and rebalancing of investment options Tax-advantaged income and death benefit options Life Insurance By adding Lincoln life insurance to your retirement plan, you can help protect your savings and gain these advantages: A tax-advantaged source of retirement income* An income tax-free death benefit Income tax-free reimbursements for qualified long-term care expenses * Income tax-free loans and withdrawals will reduce the policy s cash value and death benefit. To decide if a variable annuity or variable insurance policy is right for you, consider that its value will fluctuate, and it is subject to investment risk and possible loss of principal. With any variable annuity product, there are certain fees and costs associated such as mortality and expenses, administrative and advisory fees. With any VUL product, certain fees and costs are involved, including monthly cost of insurance, administrative expense and premium load charges, as well as daily charges on assets invested in the variable investment options for mortality and expense risk, and asset management fees. All guarantees, including those for optional features, are subject to the claims-paying ability of the issuer. Limitations and conditions apply. Please consult the prospectus or ask your financial advisor for more detailed information. 6
When it comes to financial security in retirement, ask yourself: Am I adequately accounting for the impact of taxes in my planning? How do I work more effectively with my advisor to build a tax-efficient savings and investment strategy? Can I be doing a better job of availing myself of all the tax minimization strategies appropriate to my situation? Talk to your advisor about ways to manage the IMPACT OF TAXES 7
Not a deposit Not FDIC-insured Not insured by any federal government agency Not guaranteed by any bank or savings association May go down in value 2014 Lincoln National Corporation Lincoln Financial Group 150 N. Radnor-Chester Road Radnor, PA 19087 LincolnFinancial.com Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations. LCN-879495-031414 MOS 6/14 Z02 Order code: LFD-TAX-BRC004 This material was prepared to support the promotion and marketing of investment and insurance products. Lincoln Financial Group affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein. Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk and possible loss of principal. Variable annuities contain both investment and insurance components, and have fees and charges, including mortality and expense, administrative and advisory fees. Optional features are available for an additional charge. The annuity s value fluctuates with the market value of the underlying investment options, and all assets accumulate taxdeferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Withdrawals will reduce the death benefit and cash surrender value. Investment company products are sold by prospectus. Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. A prospectus contains this and other important information about the investment. To request a prospectus call 877-533-0003 or obtain one from your investment representative. Please read it carefully before you invest or send money. Life insurance and annuities are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, and in New York by Lincoln Life & Annuity Company of New York, Syracuse, NY. Financial planning services are offered through Lincoln Financial Advisors and Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Securities are offered by Lincoln Financial Advisors, a broker-dealer (member SIPC), and distributed by Lincoln Financial Distributors, Inc., a broker-dealer.