Posted on | August 5, 2009
There Are Better Ways to Save and Have Tax-free Income in Retirement
If you’re like many Americans, you may have seen 30, 40 or 50 percent losses on the value of your 401(k)s or IRAs in the last few years. But I predict the worst hit is yet to come-and it’s not what you think.
As it is, recovering from losses can be tough. For example, when an account loses 50 percent of its value, the account has to experience a 100 percent gain just to get back to the break even point. Say you had $100,000 in a 401(k) two years ago that is now worth $50,000. Your account would need to double to get back to its original value. In this volatile economy, that could take years.
Also, retirement accounts that were once worth twice as much and generated interest income of 7, 8 or 9 percent, are now worth half as much and are only generating 2, 3 or 4 percent.
But that’s not all to be worried about.
Despite all the recent losses, I predict it will pale in comparison to the tax hit retirees will experience the day they begin withdrawing their money from their qualified retirement plans.
I had a school teacher who came to me several years ago for financial planning. She knew she would only be receiving 60 percent of the income she had when she was teaching (2 percent for every year of 30 years of service). Thus, she had socked away money faithfully in the state’s 401(k), 403(b), and in tax sheltered annuities (TSAs) to supplement her retirement.
But when she retired, she found herself in the highest tax bracket she had ever been in, even though she was not working. Why? Her house was paid off; she was not contributing to these accounts anymore; and she had no dependents. Her tax deductions were all gone. On top of her pension and social security, at age 70½ she was forced to withdraw the minimum distribution from her tax-deferred accounts. Her taxable income was $80,000 a year, with hardly any deductions. All that money she had saved in taxes during her 30 years of contributions-she essentially paid it back to Uncle Sam during the first two years of retirement, and every two years thereafter!
You see, the government has a permanent tax lien on your IRAs and 401(k)s.
One thing is certain: Future taxes will be going up. For this reason, I don’t own an IRA or 401(k)-never have, never will! There are better ways to save and have tax-free income in retirement.
There is only one savings accumulation vehicle that provides liquidity, safety, and earns an attractive rate of return that is tax advantaged while your money accumulates, and can remain tax-free when you withdraw it, and is income tax free when transferred to your spouse or heirs.
What is it?-A properly-structured, maximum-funded insurance contract under Internal Revenue Code guidelines.
I own several wherein my money grows tax-free, I can access it tax-free for income, and when I ultimately die, any money remaining will transfer income-tax free to my beneficiaries. I have every advantage that a Roth IRA or Roth 401(k) offers plus a whole lot more because I can put in as much money as I want and there are no rules on when I can withdraw my money.
If you’re feeling confused and powerless because your IRAs or 401(k)s lost 20-50 percent during the last couple of years, leaving you frustrated-even feeling paralyzed-there are safe strategies and solutions that will help you get unstuck and get your future back!