Let’s say you have $1 million saved in an IRA or 401(k) account. How much of that money is yours?
No, this is not a trick question. But sadly, it’s a question few investors consider. The answer is determined by what your tax bracket is when you retire. If you’re in the 25% tax bracket, for example, only $750,000 is actually yours to use. The remaining $250,000 will go to the government in taxes. If you’re in a 40% bracket, you’ll lose $400,000 to taxes and get to keep only $600,000 for yourself.
Here’s the rub: We spend our whole lives saving and accumulating wealth, but very little time preparing how to take the money out in a way that maximizes what we and our families get to keep. Heading into retirement, it’s important to understand what types of savings vehicles exist and how each of these will be treated during distribution.
Traditional retirement vehicles such as IRA’s, 401(k)’s, 403(b)’s, Keough’s and SEP’s may seem like a prudent choice during the ACCUMULATION period. But there’s a ticking time bomb inside every IRA, 401(k) and SEP – a tax bill that’s growing every day.
Other problems with qualified retirement accounts:
- Contributions are capped and restricted by income – you’re limited to how much you can save
- The money is not liquid or available for emergencies – you cannot access it before age 59 1/2 without penalties
- Risky – most of these accounts are in the stock market or mutual funds, and if you retire during or after a market correction, you can lose a significant portion of your savings
- Management fees – many of which are hidden – that get paid whether you make money or not
- Mandatory distributions – you are forced to take distributions (and pay taxes) at certain ages whether you want to or not
- Can result in taxation of your Social Security benefits
Did you know that there are alternatives that allow you the same advantages of 401(k) and IRAs, but without the limitations and restrictions of qualified plans? These plans allow tax-deferred growth with no contribution limits and access to your money whenever you want – free of taxes.
In addition, there are:
- 1. No minimum age or income requirements
- 2. No contribution limits – unlike 401(k)s or IRAs, you can put away as much as you want into these plans
- 3. No mandatory distributions starting at age 70 1/2 – you’re in complete control
- 4. Protection against market loss – the plan contractually guarantees that your account value will never have a negative return due to market losses
- 5. Tax-free access to your money at any age without penalty
- 6. Does not create taxation of Social Security benefits
TIME Magazine: 401(k) is “A Lousy Idea, a Financial Flop, a Rotten Repository for our Retirement Reserves”
[ Read Article ]
VIDEO: CBS MoneyWatch.com Editor-In-Chief:
Why the 401k Doesn’t Work
[ Watch Video ]
VIDEO: TIME Magazine Managing Editor:
Why It’s Time to Retire Your 401k
[ Watch Video ]