Our clients have spent years carefully building and protecting their wealth. These high-net-worth individuals come to us when they’re looking for a tax-deferred investment solution to manage and possibly grow their wealth for retirement. If you find yourself in a similar situation, you may have a few choices to consider, including a 1031 exchange. Here is a closer look at some of your options.
Classic Tax-Deferred Investment Vehicles for High-Income Earners
There are four commonly chosen strategies for tax-deferred investment:
Municipal bonds. Municipal bonds offer tax-free coupon payments during the holding period, although capital gains taxes may apply if the bond is sold for more than its purchase price. The returns are typically modest when compared to corporate bonds. A major issue with bonds is their liquidity: If you want to cash them out before maturity, you have to sell them on the open market, and you could receive less than their face value.
Roth IRA. Unlike the traditional individual retirement account, funds in a Roth IRA are not taxed on qualified withdrawals after you reach age 59½ and the money has been in the account at least five years. This is because you presumably paid taxes on the money you put into the account. The account offers a variety of investment options. You must have earned income to open a Roth account, and the big drawback of the account is that there are upper limits on that income. In 2017, you had to make less than $133,000 for single filers and $196,000 for married couples. The maximum annual direct contribution to a Roth IRA in 2017 was $5,500 for people under 50, and $6,500 for people 50 or over.
Deferred annuities. Annuities are based on the claim-paying ability of the providing insurance companies. A qualified annuity is funded with pre-tax dollars; a non-qualified annuity is funded with after-tax dollars. A fixed annuity is a contract with a fixed rate; a variable annuity invests in sub-accounts with returns (and risks) tied to a package of investments. In any case, you have to wait until you are 59½ to touch the money in a deferred annuity without paying taxes and a penalty.
There are a variety of payout options for annuities, too. Some pay for a certain period, others pay over your lifetime, and they may or may not provide money for your heirs. Annuities are designed to provide retirement income under a limited set of conditions. They may be highly specialized with various riders and additional benefits, and be somewhat complex.
1031 exchanges. This is the exchange of one investment property for another of like kind, and it is not subject to tax. The exchange can be used for purposes like diversification, avoiding depreciation recapture, and dividing or consolidating properties. When you sell your property, you are subject to long-term capital gains tax, which is lower than ordinary income tax. If you leave a property in a 1031 exchange to your heirs, they receive a step-up in basis and the property is subject only to estate tax at its current value.
The 1031 Exchange in Detail
The first thing you need for a 1031 exchange is an investment property. Personal property cannot be substituted, and there are quite a few guidelines to follow and deadlines to observe in a 1031 exchange. Investors must account for factors like identifying a replacement property and a qualified intermediary. Mortgages and differences in value between properties being exchanged must be considered, as well. Because of the complexity of these transactions, professional assistance is recommended.
For investors looking for a tax-deferred investment option, 1031 exchanges are appealing opportunities. If you are interested in the 1031 exchange and want to explore its possibilities further, you should consult a real estate investment management firm. At CWS Capital Partners, we have more than 30 years of experience helping our clients navigate the 1031 exchange process.
Please contact us to learn more about investing with CWS Capital Partners, or view our current offerings by completing our self-certification form for accredited or qualified investors.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.