Avoid The IRA/401(k) Tax Deferral Trap

Tax Treatment of The Four Phases of Retirement Planning

2011/06/07 By Scott Leave a Comment

A well compensated professional got a little anxious the other day talking about his retirement plan and his future. I’d asked him if he knew what tax bracket he’d be in when he retired and if he knew how much of his retirement savings were his and how much were Uncle Sam’s. (You might want to visit that discussion HERE, when you’re done with this page.)

He was under the impression that his 401(k) retirement savings were his and was incensed to learn that it wasn’t. To compound matters, he also believes that tax rates in the future are highly likely to be higher than they are today, so even if he hoped to be in a lower tax bracket when he retires, he expects tax rate increases will have him in the same tax bracket he’s in today – if not higher.

Here’s what he wished his 401(k) plan administrated would have told him:

There are 4 phases to retirement planning and they don’t all get the same tax treatment.

During the Contribution Phase, you get tax favored treatment – you get to defer a portion of your contribution to your retirement plan based on your income tax rate.

You also get tax favored treatment during the Accumulation Phase – as your contributions compound tax deferred.

When you’re advised to save money in a 401(k) or tax deferred Individual or SEP IRA, the ‘tax favored’ treatment during the Contribution and Accumulation phases are presented as justification for funding these plans.

Unfortunately, many people don’t realize they’ll pay taxes during the Withdrawal Phase, when they withdraw their money from their retirement plans in the future and during the Transfer Phase when those funds pass to their heirs after they die. They don’t go through any hypothetical exercises to get an understanding of what that might cost in the future and how that might impact lifestyle.

You not only defer/postpone the taxes, you postpone the tax rate, as well.

If you believe, like the professional above, that tax rates will be higher in the future, is postponing taxes like this really a good idea?

Here’s a demonstration of how to calculate the costs and impact on your lifestyle.

To protect against overpaying taxes during the Withdrawal and Transfer Phases, make sure you’re funding the right options during the Contribution Phases. Your 401(k) might cost you more than you realize. Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Planning Articles, Financial Planning for Retirement, Financial Planning Videos, Investment Consulting, Planning for Retirement

401(k) Withdrawals – How much of your tax deferred 401(k) or IRA is actually yours

2011/05/05 By Scott Leave a Comment

Consider the taxes you’ll pay on your 401(k) withdrawals. When you think of the money you’ve saved in a tax deferred 401(k) or IRA, in your opinion, how much of that money is yours?

Imagine you’ve saved $800,000 in your 401(k) and you’re in the 33% Federal tax bracket. See the circles at the bottom of Chart#1. (click photo for larger view)

What if I told you only $536,000 is yours and $264,000 belongs to the IRS. How do you feel about that?

Did you know that average for the top tax bracket in the United States from 1913 to 2011 has been 61%? If that became our reality in the future, then your share of ‘your’ money would be $312,000 and the IRS’s share would be $488,000. See Chart 2. (click photo for larger view)

Let’s take another look at this chart. Whenever you see a spike on the chart, it’s because the government had a crisis that needed funding. The first spike to 73% on the left side of the chart was to pay for World War I. After WWI, the economy was strong through the Roaring 20’s. But after the market crash of 1929 and the ensuing depression, the government raised taxes to ‘help’ our way out of the depression.

Income tax rate reached 94% at the end of World War II. Of course, this rate applied to the highest income earners, but there’s a sliding scale where the rest of the people are paying their share, as well.

The Korean War and the rebuilding of Europe and Japan kept rates at 91% until President Kennedy brought them down to 70%. Except for a blip to pay for the Vietnam War, they stayed at 70% until the early 1980s.

Do you remember the famous E.F. Hutton television commercials in the 1970s and 1980s? “When E.F. Hutton talks, people listen.” Do you know E.F. Hutton was talking about? He was helping people who didn’t want to pay the 70% taxes of the day.

Taxes dropped to generational lows during the Reagan administration and we can say they’ve been ‘On Sale’ for the past few decades. Especially when compared to the average of 61% during the past 97 years.

Take a look at the right side of the chart. What’s missing?

Remember 2001, especially 9/11? That led to the War on Terror, the War in Iraq and the War in Afghanistan. They were expensive exercises, but do you see a spike in taxes yet to pay for those wars?

There are also the unfunded entitlements the government has promised to baby boomers who are beginning to retire. We can’t forget the deficit that needs to be addressed, either.

How will that be paid? Most people today have this sense that we’ll see higher taxes in the future?

Fortunately, the top tax bracket today is 35%, well below the average of the past 97 years. But there are rumblings that the pendulum will begin swinging back from the low rates we’ve enjoyed for the past several years and move toward the historical averages.

If tax rates go up to 50%, under the long term average of 61%, now half your money is yours and half your money is Uncle Sam’s. How do you feel about that?

What can you do?

You need to understand how qualified plans work. Saving money in your tax deferred 401(k) or IRA only postpones the taxes due to the future. And, if Congress needs extra money, with the stroke of a pen they can raise taxes and further reduce your share of your qualified plan.

What do you think you should do about that?

If there were a way to save for your future where your money grew tax deferred, protected from market risk and you could access it tax free, penalty free, before age 59 ½ would you want to know how? Learn how to Avoid the 401(k)/IRA Tax Deferral Trap. Read more HERE

Call Scott Scholz, independent Registered Financial Consultant to discuss how to avoid this costly and unnecessary wealth transfer. 425-829-4110.

Filed Under: 401(k) to IRA Rollovers, 401k retirement plan, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, How to plan for retirement, Individual Retirement Account, Wealth Creation

Life Insurance – And How Can You Use It?

2011/04/18 By Scott Leave a Comment

Life Insurance, which best suits your objectives: Term life insurance for the death benefit or permanent life insurance for the tax free ‘income’ and other living benefits?

This video contains information most life insurance agents don’t even understand.

5 Minute Lesson on Life Insurance

Term Life Insurance

Life insurance, in most people’s minds, is a benefit that is paid out when someone dies. The purpose is to compensate for the loss of the income of the deceased. It might be more accurately described as ‘death insurance’ since the proceeds are dispersed after the death of the insured. Often, employers will offer term life insurance coverage on employees as a benefit for the employee’s family. In this case, the term usually lasts for the term of employment.

You may also purchase term life insurance outside of work. Term options are usually for 10 or 20 years and can extend up to 30 years. Renewal of term policies is usually expensive because you’re older and your health condition may have changed.

Term life insurance represents an economical short term or stop-gap solution that you can rent. Generally, purchasers of term life insurance believe they will accumulate enough investments that will allow them to eventually self-insure and they’ll be able to drop their term coverage when they’re older.

Permanent Life Insurance

Permanent life insurance offers a set of ‘living benefits’ in addition to the death benefit. The video above compares benefits and the mechanics and objectives for term and permanent life insurance, but a brief summary follows.

Distributions from permanent life insurance are not included in income calculations for Social Security taxation. This allows you to receive more of your Social Security benefit rather than lose it to taxes.
Distributions may decrease the taxable income you withdraw from your qualified plans, 401(k) and tax deferred IRAs.
You can access your money tax free, penalty free without the restrictions of qualified plans.
You have the ability to ‘Be Your Own Bank’ and finance investments, start a business, purchase automobiles, college funding, long term care, etc.
Your principal is protected against market risk.
You earn a potential double digit rate of return and lock in your gains every year.

The following table summarizes the characteristics of term and permanent life insurance.

Term Insurance	Permanent Insurance
Low cost – initially	Higher cost – initially
Cost goes up	Cost remains level
No equity (rent)	Builds equity (own)
Coverage ends	Coverage never ends

Permanent life insurance has been used as a ‘tax shelter’ for decades by savvy, wealthy individuals in our country. Many of our elected officials shelter money in these contracts as well, in accordance with guidelines established for their use by IRS tax acts and codes.

Permanent life insurance is one of 3 places you can legally create tax-free income for yourself in our country. For a complete discussion, see Tax Free Income Alternatives

For information how wealth accumulates inside an Equity Index Life Insurance policy, watch the Lock In & Reset Strategy.

To see how distributions can actually reduce the taxes you would otherwise pay on Social Security benefits, click HERE and watch the videos on the case studies, HERE

If you believe tax rates in the future will be higher than they are today, you may also want to investigate how you might capitalize on the tax shelter benefits available in permanent life insurance so you can retain control over more of your hard earned money, protect it against market risks and create a tax free income stream you won’t outlive.

Call Scott Scholz, independent Registered Financial Consultant, 425-829-4110. Or email scott@scottscholz.com to discuss options and applications of this wealth preservation and accumulation vehicle and to determine if it might be right for you.

Filed Under: Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Build Tax Advantaged Wealth & Tax Free Income, Financial Strategy White Papers, How to plan for retirement, Life Insurance, Lock In & Re-Set Strategy

Is Funding a 401(k) a Mistake?

2010/02/04 By Scott Leave a Comment

Funding a 401(K) could be one of the biggest mistakes you could make, according to Pulzar Inc. research. The research shows:

Your 401(K) could cause you to pay higher taxes than necessary when you retire.
Your 401(K), subject to market volatility, could leave you out of money before you die.

Does your 401k plan provide protection against negative market performance?

Most Americans have lost 20-40% in their investment accounts during the past 18 months. Yes, they’ve rebounded in the past 6 months, but what built in protection is there against another downdraft and future losses?

Does your 401k plan offer strong, solid performing options? Mr Brooks Hamilton, who designs 401K plans for B&J Partners, stated on 60 Minutes that most of the funds in 401k plans are dogs.

How has your retirement account performed over the past 10 years? Are you ahead or behind where you were in 1999? If you invested $100,000 in an S&P 500 Index Fund, here’s what you’d have in January of 2009:

2000	-9.10%	$90,900
2001	-11.89%	$80,091
2002	-22.10%	$62,391
2003	28.68%	$80,285
2004	10.88%	$89,020
2005	4.91%	$93,391
2006	15.79%	$108,138
2007	5.49%	$114,074
2008	-37%	$71,867
2009		$71,867

401(K) Tax Myths:

Do you know how much the tax deductions from retirement contributions you take today will cost you tomorrow?

Do you know how much you can contribute to a 401k?

Is your 401k/tax-deferred retirement plan actually setting you up to pay higher taxes in retirement, and have you out of money before you die?

Tax deferred retirement plans, including 401K plans, were set up as much to benefit the government as you. Calculations show that the average American who lives 20 years in retirement, will pay 5 to 8 times more taxes on distributions in retirement than he saved in taxes from contributions during his working years.

Do you know how’s it going to work out for you?

We live in complex times. Government spending and debt levels are the highest in history. Unfunded government entitlements are over $50Trillion. How are we going to pay for all this? What do you think? Are the low tax rates we’ve enjoyed for the past 30 years going to hold, stay about the same, or do you think tax rates will creep up in the future?

If tax rates go up, and you’ve deferred payment of your taxes to some future date when tax rates are higher, what will that do to your spendable income? If tax rates creep up in the future, then the conventional wisdom that says you’ll be in a lower tax bracket when you retire probably is no longer valid, is it?

How are you preparing for this? Do you know what results await you down the road? Are you certain you won’t outlive your money?

Most Americans have been brought up with the same basic goals-

Get a good education.
Get a good job.
Buy a house. Pay it off as soon as you can.
Fund the company retirement plan as aggressively as possible.
Retire at 65, if possible, and spoil the grandchildren.

If we all know this conventional wisdom and believe it works, then why did the Social Security Administration release these figures:

If you take any 100 people at the start of their working careers and follow them for 40 years until they reach ‘retirement age,’ here’s what you’ll find:

Only 1 will be wealthy;
4 will be financially secure;
5 will continue working, not because they want to but because they have to;
36 will be dead; and
54 will be dead broke – dependent on their Social Security checks, relatives, friends, even charity for a minimum standard of living.

That’s 5% successful, 95% unsuccessful. How could good advice from widely accepted conventional wisdom produce such poor results?

If there were a better way to protect and grow your funds, when would you want to know – now, while you have time on your side, or when you’re about out of money? Small, strategic adjustments can make a significant difference. Over funding a 401(K) or tax-deferred retirement plan is not one of them.

Where you accumulate your money and how you access it in retirement is every bit as important as how much money you have.

If you’re already funding a 401K or tax-deferred retirement plan, you could already be making costly errors. Wouldn’t you want to know the impact of what you’re doing now will have on your future?

Take 17 minutes and view an important case study video about Bob and Carol. Click Here. Log in and click on ‘Bob and Carol.’ (The intro and concept videos are important, but the eye-opening numbers are in the case study.) Note the subtle, simple, cost-less changes that were recommended and the powerful impact these suggestions had on their income taxes and their retirement. Then call 206-388-4074 to run your own numbers through our proprietary process and see what the difference could be for you.

Clients who’ve implemented this very strategy have not lost a single dollar due to market performance during the last 2 years. Clients who’ve implemented this strategy over the past 10 years are over 2 ½ times ahead of where they’d be in an S&P Index fund. And they’re on their way to saving tens of thousands in income taxes. For some, it’s literally a Million Dollar difference for them and the lives of their heirs. Find out what the difference could be for you.

Call today.

Filed Under: 401k retirement plan, Avoid the 401(k) IRA Tax Deferral Trap, Avoid the IRA/401(k) Tax Deferral Trap, Case Studies for Avoiding the Tax Deferral Trap, Financial Planning Articles, Planning for Retirement, Retirement Planning Software, Seattle Financial Consultant, Self Directed IRA Tagged With: 401k, 401k retirement plan, pay off mortgage, retirement, retirement account, retirement financial planner, Roth IRA, stocks, tax deferred, tax free, tax rates

Tax Treatment of The Four Phases of Retirement Planning

401(k) Withdrawals – How much of your tax deferred 401(k) or IRA is actually yours

Life Insurance – And How Can You Use It?

Life Insurance, which best suits your objectives: Term life insurance for the death benefit or permanent life insurance for the tax free ‘income’ and other living benefits?

Is Funding a 401(k) a Mistake?

The Fiscal Fitness Letter

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