Written By: Nina Avery, CFP® | Avery Safe Money Solutions
You may find it hard to believe that taxes are currently at historically low rates. You may find it harder still to believe that your traditional qualified retirement plan (IRA, 401k, 403b, etc.) is a tax bomb waiting to happen. “Conventional wisdom” advises delaying or postponing paying taxes – you might know this as deferring – but the truth is, you are not just postponing the tax, you are also postponing the tax calculation.
You can address this now and save thousands or continue to postpone and basically “finance” your tax bill. And we all know what happens when we finance things – the longer the finance period the more expensive it becomes.
You don’t have to follow everyone else off the financial cliff into the tax pit from hell. You can do something about it now.
“Whether you think you can or think you can’t… You’re right.” Henry Ford
How might you accomplish this? Quite simply – Think, plan and act like a farmer. This is known as paying tax on the seed instead of the harvest.
The farmer pays tax on the seed BEFORE he plants it so that he and his family (and only them) can enjoy the fruits of their labor. He does not delay, postpone or finance this expense with some random partner who does NO WORK but will definitely be standing there at the harvest with his hand out like a loan shark.
A close examination of traditional qualified retirement plans would suggest an entirely opposite thought process based on the unsubstantiated idea that taxes will be lower in retirement. Maybe it’s because everyone thinks income will be lower in retirement.
Have you stopped to think about whether or not that is actually true? Most likely, your house will be paid off – no mortgage interest deduction, your kids will be grown and gone (you hope!) and that deduction will be lost, any business or other active interests will most likely be gone as well. The reality is that most, if not all of your deductions will be gone.
If you factor in all of that information, how can your tax really be lower? And if the income threshold is set by the government, how can you know they will not change it later? Do you really want someone else to set your standard of living after you worked so hard all those years? Or would you rather have control?
Do you know how to boil a frog? You can’t just drop in a pot of boiling water, he will jump out! You put him in a pot of nice, comfortable, lukewarm water and keep turning up the heat until you finish the job. The frog never tries to jump out of the water because he does not feel any discomfort until it’s too late.
Don’t let the Tax Man boil you. You have alternatives. Here are a couple options to consider:
The first would be a Roth IRA. This solves the delayed tax problem but has some limitations.
- Income limitations – if you make over a certain amount of money you are not eligible to contribute to a Roth IRA
- Contribution limitations – you can only contribute a certain amount annually based on your age
- Holding periods and early withdrawal penalties
- Market risk if not held in an annuity
- Threat of revocation of tax free status if laws are changed because it is still held under the authority of the IRS
The second and more flexible would be an Infinite Banking Policy ™ or Cash Value Life Insurance Policy. This has all the benefits of a Roth IRA with none of the limitations.
- No contribution limits
- Income is not a limiting factor for participation
- You maintain liquidity, use and control of the cash in the policy – there are no IRS rules governing this plan
- Your family receives a wealth multiplier in the form of a Death Benefit – meaning the policy is worth more than the actual cash value if you pass away prematurely vs. the Roth only being worth the value of the investments on the day they are liquidated
- Life Insurance has enjoyed historically good, positive and stable returns – they made it through the Great Depression and all the recessions intact, in profit and still going strong
- When using a Whole Life policy, the cash value should be 45-60% of every dollar invested. Otherwise you may not have the most efficient plan but instead have just a very expensive insurance policy
- When using Index Universal Life, illustrations should be run at a lower than expected return to make sure the cost of insurance does not become an expensive out of pocket cost in the later years of the policy due to less than anticipated Index performance
- Use a Qualified Safe Money Advisor to ensure that your plan is properly structured and you don’t miss out on all the great benefits this strategy has to offer
For more information and to find out how to maximize your retirement savings and protect it from unnecessary taxation, call 407-367-8845 or email NinaAvery@TheSafeMoneyPro.com for a free consultation and evaluation with a Qualified Safe Money Advisor and Guaranteed Retirement Income Expert.
About Nina K Avery, CFP ® and Avery Safe Money Solutions:
Restoring confidence with Safe Money Solutions to help everyone create secure retirement incomes they can count on for the rest of their lives. Nina K Avery, Certified Financial Planner ™ professional, is gaining recognition in and around central Florida for being a Qualified Safe Money Advisor, Financial Literacy Coach & Guaranteed Retirement Income Expert. With all of the economic turmoil in the markets, the country and around the world, it’s more important than ever to understand how to keep your wealth safe and secure…but also growing.
Nina’s mission is first to educate and restore confidence. Using Safe Money Solutions, she then helps her clients create GUARANTEED retirement incomes for life. She also helps her clients avoid losing money and instead build wealth SAFELY and SECURELY. Regardless of your current financial situation, Nina can help you get on the Path to Safe Money and sleep well at night.