Credit union executives nearing retirement must find strategic ways to manage their taxes and income due to drastic tax rate changes post-retirement and following distributions from various compensation benefits such as the collateral assignment split-dollar. One solution that is proving effective for credit union leaders is direct indexing. Our direct indexing brochure provides an overview of this customizable, tax-focused investment strategy and how it can uniquely benefit credit union executives before and after retirement.

What Is Direct Indexing?

Direct indexing is an investment strategy designed to track a public index such as the S&P 500 by purchasing the underlying securities of the index. For example, instead of buying an S&P 500 ETF or mutual fund, investors can select individual securities projected to behave similarly and produce comparable returns. 

You may be wondering why an investor would want to take this approach. The primary reason is that direct indexing provides significant tax control, as investors can trade the index’s components to take advantage of tax opportunities, such as tax-loss and tax-gain harvesting. The tax advantages are why investors, particularly credit union leaders, can leverage the strategy at various income levels and each stage of their lives. For example, credit union leaders with collateral assignment split-dollar plans often see a sharp decline in tax rates in early retirement and an increase when required minimum distributions (RMDs) from qualified accounts begin at age 72. As a result, career peaks with higher income levels can benefit from tax-loss harvesting and charitable giving, while those in early retirement can benefit from tax-gain harvesting.

It is estimated that over 30 years, direct indexing can help produce up to 34% higher asset values.

Other Benefits of Direct Indexing

In addition to tax-loss and tax-gain harvesting, direct indexing offers these additional benefits:

  • Optimal for credit union leaders: Credit union executives generally experience significant tax rate differences over time, priming them to benefit from direct indexing and its tax advantages.
  • Socially responsible: With direct indexing, investors can customize their stock selections based on their social preferences, such as choosing green renewable energy companies rather than fossil fuel companies.
  • Charitably inclined investors: Investors can donate appreciated individual securities in the index and receive a tax deduction for the total value of the security and an increased basis when it is repurchased.
  • Concentrated equity: An index portfolio built around a concentrated equity position allows investors to manage their exposure and achieve a portfolio that behaves like an index.

If you’d like to share a brief overview of direct indexing and its benefits with a colleague, please download our direct indexing brochure, which includes sample projections and additional information.

You can also stream the recent episode of “C.U. on the Show” to hear ACT Advisors founders Doug English and Wes Johnson discuss direct indexing and how it can be powerful for credit union leaders.

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