The One Word That Cuts Your Retirement Nest Egg in Half
Do you know the difference between tax-deferred and tax-free? If you have a 401(k), SEP or Simple IRA, you may be setting yourself up to give away 40% to 50% of your retirement savings in taxes – unnecessarily. The good news is, you have a choice.

What many business owners don’t realize is that when they put money in an IRA or 401(k) account, they’re really not avoiding taxes. They’re simply delaying them.


The money grows tax-DEFERRED. Not tax-FREE. That’s a tremendous distinction. Tax deferred means you have to pay the bill later.


So if you have $1 million sitting in your retirement account, and you’re in the 30% tax bracket, for example, only $700,000 is yours for retirement, while $300,000 goes to federal/state governments in the form of taxes. If you’re in a higher tax bracket, the government is grabbing even more of your hard-earned savings at the expense of your family and your legacy.


So why do business owners contribute to 401(k)s or IRAs? Two reasons:

1) The allure of the tax deduction.

2) They don’t know there may be better option.


Let’s look at the allure of the tax deduction first. Bob Jones is a successful entrepreneur who makes a $25,000 contribution to his Simple IRA every year. His accountant tells him it’s a great idea because he gets a $25,000 tax deduction. Since Bob is in the 30% tax bracket, his retirement contribution will save him $7,500 in taxes.


Or will it?


The reality is, Bob is just kicking the tax can down the road. Because he’s simply postponing or deferring taxes to a future time. As his $25,000 contribution grows, the tax liability grows right alongside it. He will end up paying the $7,500 plus tax on the growth. And if tax rates go up, he will owe even more.


Do we expect taxes to be higher or lower in the future? Here’s what says:


“Considering the current budget deficits and the coming bulge of retirees who will run up Medicare and Social Security costs, it seems likely taxes will climb… every penny you eventually take from a pretax 401(k) or IRA is taxed at the much higher ordinary income rate.


“It sounds like heresy to workers who have been unremittingly lectured for the past two decades to save more in their IRAs and 401(k)s, but the truth is that there is such a thing as too much tax deferral.”


So what’s a better alternative? A Roth can be a good option. However, Roths have restrictive income limits and contribution limits.


Business owners have another choice – a retirement savings program that’s IRS approved and allows you access to your savings for tax-FREE income and to pass money on to your heirs tax-FREE. It’s called a Business Owner Private Plan (BOPP). If set up correctly in accordance with the tax code:

  • The government will fund a portion of your retirement contribution
  • You will see a larger tax break than with a 401(k) or IRA tax deduction
  • Your money grows tax-free
  • Zero taxes on retirement income
  • A way to pass wealth to your heirs tax-free
  • No contribution limits, no income limits
  • No penalties for withdrawals before age 59 1/2
  • No required mandatory withdrawals at 70 1/2
  • Savings completion guaranteed for survivor spouse
  • Principal protection with no stock market risk


You’re probably wondering, “That sounds pretty good. Why haven’t I heard about this from my accountant?” Let me ask you: When was the last time your accountant came to you proactively with ideas to lower your taxes? Besides, this is the same person who’s been badgering you to max out your 401(k) contribution in order to get the tax deduction.


It’s easy to tease accountants because sometimes they have tunnel vision and miss the big picture. That’s why we work with tax attorneys first to develop effective tax-saving strategies, and then hand it to CPAs to execute.


To be fair, there are only a handful of specialists across the US who know how to set up a tax-free BOPP properly. Your CPA may not be aware that changing the IRS “structure” from an IRA or 401(k) to a BOPP can give you tax-free growth and income, principal protection, and tax-free wealth transfer.


Again, this option is available for business owners only—one of the few perks left in an increasingly hostile tax environment. Best of all, BOPPs are not expensive or complicated. Contact us to learn more about the tax laws, designs, suitability and income comparisons of the top plans and top companies offering this.


There are pros and cons to every financial strategy, so contact us for more details and information.