High net worth investors show a strong preference for tax-advantaged investments, a strategy that addresses growing concerns about tax increases in the coming year, according to Millionaire Corner research.
Seventy percent of high net worth investors – who have investable assets of $5 million to $25 million - are worried about the potential for taxes to go up, according to a Millionaire Corner study conducted in the first quarter of 2012. Forty percent plan to adjust their investments in anticipation of higher taxes, but the vast majority of high net worth investors are already invested in products providing tax shelters.
High net worth investors allocate 21 percent of their total investable assets to tax-sheltered retirement accounts, such as IRAs and employer-sponsored retirement plans, such as a 401(k), according to a study completed by Millionaire Corner in the fourth quarter of 2011. Nearly 60 percent of high net worth investors have a 401(k) or other defined-contribution plan with an average balance of more than $1.1 million and 92 percent have an IRA with an average balance of $1,326. Both an IRAs and a 401(k) allow assets to grow tax free until they are withdrawn, and a 401(k) may also provide matching funds from an employer. The tax deferral provides tax-free compounding of investment gains.
Municipal bonds, which provide federally tax-exempt income, are also popular with high net worth investors. Forty-six percent own individual municipal bonds for an average balance of $500,000. High net worth investors also have relatively high rates of ownership of other tax-advantaged products. Nearly 60 percent own life insurance products, while 25 percent own fixed annuities for an average balance of $472,000 and 30 percent own variable annuities for an average balance of $491,000. Sixteen percent of high net worth investors own section 529 college savings plans with a balance of $92,000, while 12 percent have established Uniform Gift to Minors Accounts and 13 percent have established charitable gift funds.
In comparison, ownership rates for tax-advantaged products are significantly lower among Mass Affluent investors – those with investable assets of $100,000 up to $1 million. Eighty percent have an IRA account with an average balance of $138,000 and 72 percent have a 401(k) or other employer sponsored retirement plan with an average balance of $187,000. Thirteen percent of Mass Affluent investors own individual municipal bonds for an average balance of $144,000. Twelve percent have a 529 college savings plan with a balance of $17,000, while 5 percent have set up a Uniform Gift to Minors Account and 4 percent have charitable gift funds. Sixty-five percent own life insurance policies, while 19 percent owe fixed annuities for an average balance of $236,000 and 18 percent own variable annuities for an average balance of $218,000.
High net worth investors face significant tax consequences if Congress fails to renew tax breaks dating back to 2001. The Bush-era tax cuts lowered the top tax rate on adjusted gross income, as well as tax rates for investment income from capital gains and dividends – important sources of investments for high net worth investors.