Regardless of What Warren Buffet Says – Diversification is NOT a Naughty Word

It may fly straight in the face of what you believe, but Warren Buffett is not always spot on with his investment advice. He has spoken out against diversity in investments for a long time. Sure, he has a good record and made some serious money on his correct forecasting of energy stocks. That doesn’t mean that you should put all of your money into energy stocks. In fact, unless you have a crystal ball that delivers accurate predictions on the stock market, you shouldn’t put all your eggs in one basket no matter what anyone says.

Diversification is not a new concept, but it is one that my clients are constantly fighting against. That is, until we talk about the options they have for withdrawing cash during their retirement. That’s where tax class diversification comes in. When you retire, there are two types of investments you can withdraw from – ones that are tax free and ones that are taxed. If you had your choice, which one would you take? Right, tax free. Almost all of my clients say the same thing. That’s why I am an avid proponent of funding plans where taxes are taken out on the front end. This eliminates the potential “tax bomb” that can come during retirement.

I have recently added Section 79 Permanent Benefit Plans to my arsenal. The Section 79 plan is a benefit plan designed to provide permanent benefits that are in addition to the group term-life insurance available through IRC Section 79. Under this plan, employers are able to offer group term life insurance death benefits of up to $50,000 income tax free. Since the owners of C corporations qualify as employees under the plan, they are eligible to take advantage of a Section 79 plan. Not only can they take advantage of the death benefit, the premium payments can be fully deducted from their tax liability. In addition, as a participant, you as a business owner enrolled in the section 79 plan, have access to the policy cash value tax free to supplement your retirement.

The funds withdrawn from a Section 79 plan are tax free and there are no age requirements as they are in other qualified plan such as a 401k or IRA. If you choose a pretax or delayed tax plan (like an IRA) you are subject to the tax rate that exists when you retire. With these plans you are betting that taxes will stay the same or go down – something that I wouldn’t bet on.
The section 79 plan is just one of the many plans that you can use to become tax independent at retirement. Of course, traditional IRAs can still be used as well but you will be at the mercy of the tax laws when you retire. For more advice on retirement funding and to find out what other plans are available to you, contact me at Palma Financial Services, Inc. for a free consultation.