If there’s one piece of financial advice that everyone seems to agree on, it’s making sure to save for retirement. While the essence of this advice is spot-on, the way that most people follow it is completely wrong. When most people think “retirement savings,” they think of a 401(k) or an IRA plan. A lot of well-meaning, otherwise financially-savvy folk funnel large portions of their earnings into these types of accounts, believing that they’re doing their future selves a big favor. The truth is that, while you should always be saving for retirement, tax-deferred accounts such as 401(k)s and IRAs can be a very bad way to do it, and here’s why.
First, a brief refresher on the definition of these two common retirement options. A 401(k) is an employer-sponsored retirement plan that allows employees to contribute to a retirement account on a tax-deferred basis. An IRA, or Individual Retirement Account, is a similar account that can be set up independently with a financial institution. Now, let’s look at the major reasons why neither of these accounts are not the best choice for retirement savings.
Primarily, there’s a huge potential for financial loss. The way that these accounts are usually structured means that, unless the economy is consistently trending upward, you’re going to lose money. In today’s volatile economy, that means major losses are common. It can take years to make that money back. In some cases, the losses might be so severe that you’re still “in the hole” when you reach retirement age. Consider that, if an account loses 50 percent of its value in a sharp market decline (like the ones we’ve been seeing), it will need to double in value just to get back to where it started.
Because of the volatile economy, these accounts are also generating less interest in the form of returns. This results in providing limited or reduced income during retirement. Given that this interest for retirement income is one of the biggest attractions of these accounts, that’s a major drawback.
For 401(k) plans, you must also consider the administrative costs. These plans are a significant employee benefit and they often entail a fair amount of overhead, i.e., employee education and communication plus upkeep costs such as compliance monitoring. All of these expenses get passed on to you, the employee, in the form of participant fees and other itemized expenses.
There’s also the matter of strict contribution limits. You can only contribute a relatively small amount to your IRA each year meaning that, if it’s not growing steadily with the market, you’re not going to have as large of a nest egg when you retire.
But by far the biggest negative of both of these retirement plan types has to do with the tax hits you’ll take when it comes time to tap into your funds. When you retire, all or most of your deductions are likely to be gone — you probably won’t have any mortgage payment, no more dependents and no more annual, tax-deferred contributions to retirement accounts. Losing these deductions raises your taxable income.
Not only will you lose deductions but, the marginal tax rates are likely to be higher when you retire. The current U.S. budget deficit is over $1.1 trillion and growing by at least 1% per year. This runaway deficit and the massive federal spending that will result if the New Green Deal is enacted will certainly push the deficit (and tax rates) higher. If this tax increase coincides with your retirement and loss of deductions, you could find yourself paying more taxes during retirement than you did during your highest wage-earning years.
Additionally, even if you don’t need the money from your IRA or 401(k), you are required, at age 70.5, to withdraw a minimum yearly amount from your retirement account. This provision is referred to as a Required Minimum Distribution (RMD). Should you find yourself in this situation, it’s likely that you’ll be in a higher tax bracket than ever. Sadly, all of the money that you’ve saved so diligently over the years is suddenly going right back to the government in the form of taxes.
Any money you withdraw from your 401(k) or IRA is taxed at the personal income tax level, which is projected to become very high. Had you kept the money out of a tax-deferred account, your gains would have been taxed at the much lower capital gains rate. Because tax increases are definitely coming, this issue with tax-deferred retirement accounts will only get worse. The best solution would be to save the money and withdraw it in a way that legally avoids the pitfall of higher future tax rates and lower personal tax deductions. The impact of having to withdrawal a higher amount to pay for increased taxes and to support a higher cost of living, increases your taxes by default, regardless if tax rates rise in the future. The other surprise tax for retirees is how their former 401(k) and IRA savings distributions expose 85% of their Social Security income to federal income tax.
Even with these issues, the advice we mentioned at the very beginning holds true; it’s always a good idea to save for retirement. So, what should you do? Luckily, there’s another, much more advantageous option when it comes to building up your nest egg; a Special Designed Insurance Contract SDIC approved under IRS guidelines.
This type of account earns a historically attractive return without market loss exposure, it’s tax-free when you withdraw or transfer it, it has no contribution limits and there never any RMDs. It has a proven track record of measurable results, outperforming traditional retirement vehicles. It can be a key way to grow your retirement savings and use it tax-free. When used as a tax-free income source, it does not negatively impact your Social Security income. This alternative also prevents any inheritance tax to adult children. Inherited RMDs only force additional taxes on the next generation.
This coming Tuesday, I’ll be teaching my Wealth Protection Webinar. This no cost, no obligation educational event will teach you one of our proven strategies with a track record of measurable results. Let me teach you how you can have a retirement income source where your money grows without tax, you can use it without tax and you can leave it to your children, again without tax. This solution does not result in tax on your Social Security and it doesn’t force you to pay higher Medicare Parts B and D premiums.
Don’t follow mainstream retirement advice and save your money in IRAs or 401(k)s. This fraudulent retirement scheme is designed to make you the government’s perfect taxpayer. With more taxes on the way, I want to teach you a better way to save, grow, protect and keep more of your money for yourself.
To register, go to www.RetirementProtected.com, enter the required information and submit your registration. Once you’ve registered, you’ll receive an email containing a personal link to join Tuesday’s event.
I encourage you to register for your preferred webinar time now, because these events fill up fast. For those who attend this event, I will gift you an e-copy of my latest book, The Baby Boomer Retirement Breakthrough-The Unfair Advantage to a Safe and Secure Retirement.