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Michael Christodoulou

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

If you work for a midsize or large company, you may soon be able to review your employee benefits package, as we are entering the open enrollment season. So, consider your options carefully, with an eye toward making changes appropriate for your needs. Here are some of the key areas to look at:

RETIREMENT PLAN

Depending on your employer, you could change your 401(k) or similar retirement plan at any time of the year, but you might want to use the open enrollment season to review your contribution amounts. If your salary has gone up over the past year, you might want to boost your pre-tax contributions (including catch-up contributions beginning at age 50). At a minimum, try to put in at least enough to earn your employer’s match, if one is offered. At the same time, look over how your contributions are allocated among the various investment options in your plan. You’ll want your investment mix to reflect your goals, risk tolerance and time horizon. 

LIFE INSURANCE

If your employer offers group life insurance at no cost as an employee benefit, you may want to take it — but be aware that it might not be enough to fully protect your family should anything happen to you. You may have heard that you need about seven to 10 times your annual income as a life insurance death benefit, but there’s really no one right answer for everyone. Instead, you should evaluate various factors — including your mortgage, your income, your spouse’s income (if applicable), your liabilities, the number of years until your retirement, number of children and their future educational needs — to determine how much insurance you need. If your employer’s group policy seems insufficient, you may want to consider adding some outside overage.

DISABILITY INSURANCE

Your employer may offer no-cost group disability insurance, but as is the case with life insurance, it might not be sufficient to adequately protect your income in case you become temporarily or permanently disabled. In fact, many employer-sponsored disability plans only cover a short period, such as five years, so to gain longer coverage up to age 65, you may want to look for a separate personal policy. Disability policies vary widely in premium costs and benefits, so you’ll want to do some comparison shopping with several insurance companies.

FLEXIBLE SPENDING ACCOUNT

A flexible spending account (FSA) lets you contribute up to $3,200 pre-tax dollars to pay for some out-of-pocket medical costs, such as prescriptions and insurance copayments and deductibles. You decide how much you want to put into your FSA, up to the 2025 limit. You generally must use up the funds in your FSA by the end of the calendar year, but your employer may grant you an extension of 2½ months or allow you to carry over up to $640. 

HEALTH SAVINGS ACCOUNT

Like an FSA, a health savings account (HSA) lets you use pre-tax dollars to pay out-of-pocket medical costs. Unlike an FSA, though, your unused HSA contributions will carry over to the next year. Also, an HSA allows you take withdrawals, though they may be assessed a 10% penalty. To contribute to an HSA, you need to participate in a high-deductible health insurance plan.  

Make the most of your benefits package — it can be a big part of your overall financial picture. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou

The movement of the financial markets can seem mysterious — and yet, if we look back over long periods, we can see definite patterns that consistently repeat themselves. As an investor, how should you respond to these market cycles?

When stock prices begin falling dramatically, it can appear that your only option is to sell to limit losses. But we disagree — if you’re a long-term investor, the difference between success and failure may be determined by your actions during a stock market decline.

To begin with, it’s useful to know something about the nature of a market cycle and its connection to the business or economic cycle, which describes the fluctuations of the economy between periods of growth and contraction. Issues such as employment, consumer spending, interest rates and inflation can determine the stage of the business cycle. On the other hand, the market cycle refers to what’s happening in the financial markets — that is, the performance of all the different types of investments. 

The market cycle often anticipates the business cycle. In other words, the stock market may peak, or hit bottom, before the business cycle does the same. That’s partially because the financial markets are always looking ahead. If they foresee an event that could boost the business cycle and help the economy, such as the Federal Reserve lowering interest rates, they may become more “bullish” on stocks, thus driving the market up. 

Conversely, if the markets think the business cycle will slow down and the economy will contract, they may project a decline in corporate earnings and become more “bearish” on stocks, leading to a market drop.

Once you’re familiar with the nature of market cycles, you won’t be surprised when they occur. But does that mean you should base your investment strategy on these cycles?

Some people do. If they believe the market cycle is moving through a downward phase, they may try to cut their perceived losses by selling stocks — even those with strong fundamentals and good prospects — and buying lower-risk investments. While these “safer” investments may offer more price stability and a greater degree of preservation of principal, they also won’t provide much in the way of growth potential. And you’ll need this growth capacity to help reach your long-term goals, including a comfortable retirement. 

On the other hand, when investors think the market cycle is moving upward, they may keep investing in stocks that have become overpriced. In extreme cases, unwarranted investor enthusiasm can lead to events such as the dotcom bubble, which led to a sharp market decline from 2000 through 2002. 

Rather than trying to “time” the market, you may well be better off by looking past its cycles and following a long-term, “all-weather” strategy that’s appropriate for your goals, risk tolerance, time horizon and need for liquidity. And it’s also a good idea to build a diversified portfolio containing U.S. and foreign stocks, mutual funds, corporate bonds, U.S. Treasury securities and other investments. While diversification can’t protect against all losses, it can help protect you from market volatility that might primarily affect just one asset class.

Market cycles often draw a lot of attention, and they are relevant to investors in the sense that they can explain what’s happening in the markets. Yet, when it comes to investing, it’s best not to think of cycles but rather of a long journey – one that, when traveled carefully, can lead to the destinations you seek. Market declines can test the nerves of even the most patient investors. If you own a diversified mix of quality investments, resist the temptation to sell or make changes based on short-term events.

The next time the market has a hiccup, take a deep breath and remember: 

• Market declines are normal, frequent and not a reason to sell quality investments. 

• Market declines begin and end without warning. 

• Market declines provide an opportunity to buy quality investments at lower prices.

• Market declines return investments to their rightful owners: those who understand why they own what they own.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIPC. This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

Once you’re retired, you will likely need to draw on several types of income for your living expenses. You’ll need to know where these funds are coming from and how much you can count on, but you should also be aware of how this money is taxed — because this knowledge can help you plan and budget for your retirement years.  

Here’s the basic tax information on some key sources of retirement income:

Social Security:  Many people don’t realize they may have to pay taxes on their Social Security benefits. Whether your benefits will be taxed depends on how much other taxable income you receive from various sources, such as self-employment, stock dividends and interest payments. You’ll want to check with your tax advisor to determine whether your income reaches the threshold where your Social Security benefits will be taxed. The lower your total taxable income, the lower the taxes will be on your benefits. The Social Security Administration will not automatically take out taxes from your monthly checks — to have taxes withheld, you will need to fill out Form W-4V (Voluntary Withholding Request). Again, your tax advisor can help you determine the percentage of your benefits you should withhold. 

Retirement accounts: During your working years, you may have contributed to two basic retirement accounts: an IRA and a 401(k) or similar plan (such as a 457(b) plan for state and local government employees or a 403(b) plan for educators and employees of some nonprofits). If you invested in a “traditional” IRA or 401(k) or similar plan, your contributions may have been partially or completely deductible and your earnings grew on a tax-deferred basis. But when you start taking withdrawals from your traditional IRA or 401(k), the money is considered taxable at your normal income tax rate. However, if you chose the “Roth” option (when available), your contributions were not deductible, but your earnings and withdrawals are tax-free, provided you meet certain conditions. 

Annuities: Many investors use annuities to supplement their retirement income. An annuity is essentially a contract between you and an insurance company in which the insurer pays you an income stream for a given number of years, or for life, in exchange for the premiums you paid. You typically purchase a “qualified” annuity with pre-tax dollars, possibly within a traditional IRA or 401(k), so your premiums may be deductible, and your earnings can grow tax deferred. Once you start taking payouts, the entire amount — your contributions and earnings — are taxable at your individual tax rate. 

On the other hand, you purchase “non-qualified” annuities with after-tax dollars, so your premiums aren’t deductible, but just like qualified annuities, your earnings grow on a tax-deferred basis. When you take payments, you won’t pay taxes on the principal amounts you invested but the earnings will be taxed as ordinary income. 

We’ve looked at some general rules governing different sources of income, but you should consult your tax professional about your specific situation. 

Ultimately, factors such as your goals, lifestyle and time horizon should drive the decisions you make for your retirement income. Nonetheless, you may want to look for ways to control the taxes that result from your various income pools. And the more you know about how your income is taxed, the fewer unpleasant surprises you may experience. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIP

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou

If you’ve retired, you may have thought you closed the book on one chapter of your life. But what happens if you need to “reverse” your retirement?

Due to higher inflation and rising interest rates, many retirees are taking out more money from their retirement accounts than they had originally anticipated. As a result, some are headed back to the workforce. If you’re thinking of joining them, you’ll need to consider some factors that may affect your finances. 

First, if you’ve been taking Social Security, be aware that you could lose some of your benefits if you earn over a certain level, at least until you reach your full retirement age, which is likely between 66 and 67. Specifically, if you are under your full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit, which, in 2024, is $22,320. In the year you reach your full retirement age, Social Security will deduct $1 in benefits for every $3 you earn above a different limit, which, in 2024, is $59,520. 

Social Security will only count your earnings up to the month before you reach your full retirement age, at which point your earnings will no longer reduce your benefits, regardless of how much you earn. Also, Social Security will recalculate your benefit amounts to credit you for the months your payments were reduced due to your excess earnings. Social Security also allows you to pay back early benefits received if you withdraw your application within 12 months of starting benefits. This move could help you receive substantially higher benefits at full retirement age.

Your Social Security isn’t the only benefit that could be affected by your earnings. Your Medicare Part B and Part D premiums are based on your income, so they could rise if you start earning more money. Also, your extra income could push you into a higher tax bracket.

Nonetheless, you can certainly gain some benefits by returning to the working world. Obviously, you’ll be making money that can help you boost your daily cash flow and possibly reduce some debts. But depending on where you work, you might also be able to contribute to a 401(k) or other employer-sponsored retirement plan. And regardless of where you work, you’ll be eligible to contribute to an IRA. By putting more money into these accounts, you may well be able to strengthen your financial position during your retirement years. You might also be able to receive some employee benefits, such as group health insurance — which could be particularly valuable if you haven’t yet started receiving Medicare. 

In addition to the potential financial advantages of going back to work, you might get some social benefits, too. Many people enjoy the interactions with fellow workers and miss these exchanges when they retire, so a return to the workforce, even if it’s on a part-time basis, may give you an emotional boost.

In the final analysis, you’ll want to weigh the potential costs of going back to work against the possible benefits. There’s no one right answer for everyone, but by looking at all the variables, you should be able to reach a decision that works for you. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook, Member SIP

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou

If you own a business and you offer a 401(k) or similar retirement plan to your employees, you’ll want to stay current on the various changes affecting these types of accounts. And in 2024, you may find some interesting new developments to consider.

These changes are part of the SECURE 2.0 Act, enacted at the end of 2022. And while some parts of the law went into effect in 2023 — such as the new tax credit for employer contributions to start-up retirement plans with 100 or fewer employees — others were only enacted this year. 

Here are some of these changes that may interest you: 

New “starter” 401(k)/403(b): If you haven’t already established a retirement plan, you can now offer a “starter” 401(k) or “safe harbor” 403(b) plan to employees who meet age and service requirements. These plans have lower contribution limits ($6,000 per year, or $7,000 for those 50 or older) than a typical 401(k) or 403(b) and employers can’t make matching or nonelective contributions. These plans are low-cost and easy to administer but the credit for employer contributions doesn’t apply, as these contributions aren’t allowed, and since start-up costs are low, the tax credit for these costs will be correspondingly lower than they’d be for a full-scale 401(k) plan. 

Matches for student loan payments: It’s not easy for young employees to save for retirement and pay back student loans. To help address this problem, Congress included a provision in Secure 2.0 that allows employers the option to provide matching contributions to employees’ retirement plans (401(k), 403(b), 457(b) and SIMPLE IRAs) when these employees make qualified student loan payments. Of course, if you offer this match for student loan payments, your costs will likely increase, although these matching contributions are tax deductible. In any case, you may want to balance any additional expense with the potential benefit of attracting and retaining employees, particularly those who have recently graduated from college. 

401(k) eligibility for part-time employees: Part-time employees who are at least 21 years old and have at least 500 hours of service in three consecutive years must now be eligible to contribute to an existing 401(k) plan. The inclusion of part-time employees could lead to higher business expenses for you, depending on the amount of contributions you may make to employees’ plans. Again, though, you’d be offering a benefit that could be attractive to quality part-time employees. 

Emergency savings account: Many people, especially those who don’t earn high incomes, have trouble building up emergency funds they can tap for unexpected costs, such as a major home or car repair or large medical expenses. Now, if you offer a 401(k), 403(b) or 457(b) plan, you can include a pension-linked emergency savings account (PLESA) that allows non-highly compensated employees to save up to $2,500, a figure that will be indexed for inflation in the future. PLESA allows for tax-free monthly withdrawals without incurring a 10% tax penalty. PLESA contributions are made on an after-tax (Roth) basis and must be matched at the same rate as other employee contributions.  

You may want to consult with your tax and financial professionals to determine how these changes may affect what you want to do with your retirement plan. The more you know, the better your decisions likely will be. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

We all hope to remain healthy and independent throughout our lives — but life can be unpredictable. If you were ever to need some type of long-term care, would you be financially prepared?

Long-term care encompasses everything from the services of a home health aide to a stay in an assisted living facility to a long residence in a nursing home. You may never need any of these kinds of care, but the odds aren’t necessarily in your favor: Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years, according to the U.S. Department of Health and Human Services.

And all types of long-term care can involve considerable financial expense. The median annual cost for a home health aide’s services is more than $60,000 per year, and it’s more than $100,000 per year for a private room in a nursing home, according to Genworth, an insurance company. Furthermore, contrary to many people’s expectations, Medicare usually pays very little of these costs. 

Of course, some people expect their family will be able to take care of their long-term care needs. But this may not be a viable strategy. For one thing, your family members simply may not have the skills needed to give you the type of care you may require.  Also, by the time you might need help, your grown children or other family members might not live in your area. 

So, you may need to protect yourself and your loved ones from the potential costs of long-term care. Basically, you’ve got two main choices: You could self-insure or you could transfer the risk by purchasing some type of long-term care insurance. 

If you have considerable financial resources, you might find self-insuring to be attractive, rather than choosing insurance and paying policy premiums.  You may wish to keep an emergency savings or investment account that’s earmarked exclusively for long-term care to help avoid relying on your other retirement accounts. But self-insuring has two main drawbacks.  First, because long-term care can be costly, you might need to plan for a significant amount. And second, it will be quite hard to predict exactly how much money you’ll need, because so many variables are involved — your age when you start needing care, interest rates or inflation, the cost of care in your area, the type of care you’ll require, the length of time you’ll need care, and so on. 

As an alternative to self-insuring, you could purchase long-term care insurance, which can provide benefits for home health care, adult day care and assisted living and nursing home facilities. However, you will need to consider the issues attached to long-term care insurance. For one thing, it can be expensive, though the younger you are when you buy your policy, the more affordable it may be. 

Also, long-term care policies typically require you to wait a certain amount of time before benefits are paid. But policies vary greatly in what they offer, so, if you are thinking of buying this insurance, you’ll want to review options and compare benefits and costs.

In any case, by being aware of the potential need for long-term care, its cost and the ways of paying for it, you’ll be able to make the appropriate decisions for your financial situation, your needs and your loved ones.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

 

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By Michael Christodoulou

One of your important sources of retirement income will likely be Social Security — but when should you start taking it?

You can start collecting Social Security benefits at 62, but your checks will be considerably bigger if you wait until your full retirement age, which is likely between 66 and 67. You could even wait until you’re 70, at which point the payments will max out, except for yearly cost-of-living adjustments. But if you need the money, you need the money, even if you’re just 62 or any age before full retirement age. 

However, if you have adequate financial resources to meet your monthly needs, whether through earned income, your investment portfolio or a combination of the two, you could have some flexibility in choosing when to take Social Security. In this case, you may want to weigh these considerations:

Life expectancy: For all of us, it’s one of life’s great mysteries: How long will we live? Of course, we can’t see into the future, so the question can’t be answered with total confidence. But to make an informed decision on when to take Social Security, you don’t need to know your exact lifespan — you just need to make a reasonably good estimate. 

So, for example, if you’re approaching 62, you’re enjoying excellent health and you have a family history of longevity, you might conclude it’s worth waiting a few years to collect Social Security, so you can receive the bigger payments. Conversely, if your health is questionable and your family has not been fortunate in terms of longevity, you might want to start taking your benefits earlier. 

Employment: You can certainly continue working and still receive Social Security benefits. However, if you’re under your full retirement age for the entire year, Social Security will deduct $1 from your benefits for every $2 you earn above the annual limit of $22,320. In the year you reach your full retirement age, Social Security will deduct $1 in benefits for every $3 you earn above $59,520. So, you may want to keep these reductions in mind when deciding when to begin accepting benefits. Once you reach your full retirement age, you can earn any amount without losing benefits. (Also, at your full retirement age, Social Security will recalculate your benefit amount to credit you for the months you received reduced benefits because of your excess earnings.)

Spouse: Spouses can receive two types of Social Security benefits: spousal and survivor. With a spousal benefit, your spouse can receive up to 50% of your full retirement benefits, regardless of when you start taking them. (Your spouse’s benefit can be reduced by the amount of their own retirement benefit and whether they took Social Security before their full retirement age.) But with a survivor benefit, your decision about when to take Social Security can make a big difference. 

A surviving spouse can receive the larger of their own benefit or 100% of a deceased spouse’s benefit, so if you take benefits early and receive a permanent reduction, your spouse’s survivor benefit may also be reduced for their lifetime. 

When to take Social Security is an important — and irrevocable — decision. So, consider all the factors before making your choice. 

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Edward Jones, Member SIPC

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By Michael Christodoulou

Michael Christodoulou

As we begin the new year, you may be receiving various tax statements from your financial services provider — so it’s a good time to consider how your investments are taxed. This type of knowledge is useful when you’re doing your taxes, and, perhaps just as important, knowing the type of taxes you generate can help you evaluate your overall investment strategy. 

To understand the tax issues associated with investing, it’s important to understand that investments typically generate either capital gains or ordinary income. This distinction is meaningful because different tax rates may apply, and taxes may be due at different times. 

So, when do you pay either capital gains taxes or ordinary income taxes on your investments? You receive capital gains, and pay taxes on these gains, when you sell an investment that’s increased in value since you purchased it. Long-term capital gains (on investments held more than a year) are taxed at 0%, 15% and 20%, depending on your income. 

Also, qualified dividends — which represent most of the dividends paid by American companies to investors — are taxed at the same rates as long-term capital gains. (Keep in mind that you’ll be taxed on dividends even if you automatically reinvest them.)

On the other hand, you pay ordinary income taxes on capital gains resulting from sales of appreciated assets you’ve held for one year or less. You also pay ordinary income taxes when you receive “ordinary” dividends, which are paid if you purchase shares of a company after the cutoff point for shareholders to be credited with a stock dividend (the ex-dividend date). 

Because your ordinary income tax rate may be much higher than even the top long-term capital gains rate, you may be better off, from a tax standpoint, by focusing on investments that generate long-term capital gains. And the best strategy for doing just that is to buy quality investments and hold them for the long term. By doing so, you could also reduce the costs and fees associated with frequent buying and selling.

The investment tax situation has another twist, though, because not all ordinary income is taxable — and if it is, it may not be taxable immediately. The most common example of this is tax-deferred accounts, such as a traditional IRA and 401(k). When you take money from these accounts, typically at retirement, you’ll pay taxes at your personal tax rate, but for the years and decades before then, your taxes were deferred, which meant these accounts could grow faster than ones on which you paid taxes every year. Consequently, it’s generally a good idea to regularly contribute to your tax-advantaged retirement accounts. 

Finally, some investments and investment accounts are tax free. Municipal bonds are free from federal income taxes, and often state income taxes, too. And when you invest in a Roth IRA, your earnings can grow tax free if you don’t start taking withdrawals until you’re at least 59½ and you’ve had your account at least five years. 

Ultimately, tax considerations probably shouldn’t be the key driver of your investment choices. Nonetheless, knowing the tax implications of your investments — specifically, what type of taxes they may generate and when these taxes will be due — can help you evaluate which investment choices are appropriate for your needs.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Edward Jones, Member SIPC

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By Michael Christodoulou

Michael Christodoulou

It’s been a bumpy year for the financial markets — which means that some of your investments may have underperformed or lost value. Can you use these losses to your advantage?

It’s possible. If you have some investments that have lost value, you could sell them to offset taxable capital gains from other investments. If your losses exceed gains for the year, you could use the remaining losses to offset up to $3,000 of ordinary income. And any amount over $3,000 can be carried forward to offset gains in future years. 

This “tax-loss harvesting” can be advantageous if you plan to sell investments that you’ve held in taxable accounts for years and that have grown significantly in value. And you might receive some gains even if you take no action yourself. For example, when you own mutual funds, the fund manager can decide to sell stocks or other investments within the fund’s portfolio and then pay you a portion of the proceeds. These payments, known as capital gains distributions, are taxable to you whether you take them as cash or reinvest them back into the fund. 

Still, despite the possible tax benefits of selling investments whose price has fallen, you need to consider carefully whether such a move is in your best interest. If an investment has a clear place in your holdings, and it offers good business fundamentals and favorable prospects, you might not want to sell it just because its value has dropped. 

On the other hand, if the investments you’re thinking of selling are quite similar to others you own, it might make sense to sell, take the tax loss and then use the proceeds of the sale to purchase new investments that can help fill any gaps in your portfolio. 

If you do sell an investment and reinvest the funds, you’ll want to be sure your new investment is different in nature from the one you sold. Otherwise, you could risk triggering the “wash sale” rule, which states that if you sell an investment at a loss and buy the same or a “substantially identical” investment within 30 days before or after the sale, the loss is generally disallowed for income tax purposes.

Here’s one more point to keep in mind about tax-loss harvesting: You’ll need to take into account just how long you’ve held the investments you’re considering selling. That’s because long-term losses are first applied against long-term gains, while short-term losses are first applied against short-term gains. (Long-term is defined as more than a year; short-term is one year or less.) 

If you have excess losses in one category, you can then apply them to gains of either type. Long-term capital gains are taxed at 0%, 15% or 20%, depending on your income, while short-term gains are taxed at your ordinary income tax rate. So, from a tax perspective, taking short-term losses could provide greater benefits if your tax rate is higher than the highest capital gains rate.

You’ll want to contact your tax advisor to determine whether tax-loss harvesting is appropriate for your situation — and you’ll need to do it soon because the deadline is Dec. 31. But whether you pursue this technique this year or not, you may want to keep it in mind for the future — because you’ll always have investment tax issues to consider.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

If your children are grown and your mortgage is paid off, do you still need to carry life insurance? 

It depends on your situation, but for many people, a cash-value life insurance policy, such as whole life or universal life, can be a valuable, tax-efficient source of retirement income. And by drawing on the cash value of your policy, you might be able to temporarily reduce the amount you take out from your retirement accounts, such as your IRA and 401(k). This ability could be especially important when the financial markets are down — you’d probably like to avoid liquidating your assets when their prices have dropped.  

Basically, you can use the cash in your policy in the following ways:

Withdrawals: You can typically withdraw part of the cash value of your life insurance without losing coverage. You generally won’t incur income taxes on these withdrawals, up to the amount you’ve put into the policy — that is, the premiums you’ve paid. Once your withdrawals exceed this amount, you would generally owe taxes. Also, keep in mind that any withdrawals will reduce your policy’s death benefit and the available cash surrender value.

Policy loans: Rather than taking a withdrawal from your policy, you could take out a loan. You won’t have to go through an approval process or income verification, and policy loans typically have lower interest rates than bank loans and don’t assess closing costs. Plus, because your insurer will be lending you the money and using the cash in your policy as collateral, your policy’s cash value can remain intact and still potentially grow. However, policy loans do carry some issues of which you should be aware. For one thing, while a loan usually isn’t taxable, you could end up owing taxes on any unpaid loan balance, including interest. And if this balance exceeds the policy’s cash value, it could cause your policy to lapse. Also, outstanding loans can reduce your death benefit. 

Cashing out: If you cash out, or “surrender,” your policy, you can receive the entire cash value, plus any accrued interest. You will have to subtract any money needed to pay policy loans, along with unpaid premiums and surrender fees, which can be significant. Also, any amount you receive over the policy’s cash basis — the total of premiums you’ve paid — will be taxed as regular income. 

1035 Exchange: Through what’s known as a Section 1035 Exchange, you can transfer your life insurance policy to an annuity, which can be structured to pay you a lifetime income stream. The exchange won’t be taxable but surrender charges may still apply.  

Given the potential tax implications of the above options, you may want to consult with your tax advisor before making any moves. Also, be sure you are comfortable with a reduced or eliminated death benefit. Specifically, you’ll want to be confident that your spouse or other family members don’t need the proceeds of your policy. This may require some discussions about your loved ones’ plans and needs. And don’t forget that life insurance can help your family pay for final expenses, such as funeral costs and unpaid medical bills.

Whether it’s providing you with needed retirement income or helping your family meet future needs, your cash value life insurance policy is a valuable asset so try to put it to the best use possible.  

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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