Is Your Personal Balance Sheet – Your Financial Snapshot – Giving You a True Picture?

A balance sheet shows you at a glance what you own, what you owe, and what the difference is. The difference is your “net worth” – and the greater your net worth, the more you’re in a position to meet life’s financial uncertainties.

A balance sheet for John and Jane Doe, showing assets including $300,000 in retirement savings; and showing liabilities.
Figure 1. A Simple Balance Sheet
It’s called a balance sheet because your assets minus your liabilities always equals – balances – your net worth.

If you owe more than you own, your net worth is a negative number, and that’s an early indication of possible financial problems or bankruptcy in your future.

Here’s a simple balance sheet. See Figure 1. We see that John and Jane have added up the fair market value of their major possessions – their house, car, furnishings, cash in the bank, and retirement savings – and have total assets of $570,500. But when we subtract what they owe – their first and second mortgages, car loan, student loan, and credit card balances – their net worth (the cash they could come up with if they sold everything) is $369,000.

A balance sheet for John and Jane Doe, showing assets including $300,000 in retirement savings; and showing liabilities.
Figure 1. A Simple Balance Sheet
It’s called a balance sheet because your assets minus your liabilities always equals – balances – your net worth.

That’s the snapshot taken on December 31. A snapshot taken a month later could look different. The loan balances might be smaller. That would make John and Jane’s net worth a little larger.

Many personal finance software packages make creating a balance sheet quick and easy. Most financial planners will suggest you create a balance sheet at least once each year to track your progress toward financial independence.

Your personal balance sheet can tell you a lot, but it may not be telling you everything. When it comes to calculating the net worth of retirement accounts, your balance sheet can be extremely misleading – and not in your favor.

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Why Your Personal Balance Sheet May Not Accurately Reflect Your Net Worth

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Let me show you why having $300,000 cash value in a properly designed dividend-paying whole life insurance policy is much, much better than having $300,000 in a traditional IRA, 401(k) plan, 403(b) TSA plan, Thrift saving account, or 457 plan.

On your balance sheet, any of those traditional retirement accounts would be listed as an asset worth $300,000. Again, see Figure 1.

But all your traditional retirement accounts (except for Roth accounts) have a significant income tax liability lurking inside of them. You’ve deferred paying income tax on the money you used to fund those accounts, but you haven’t escaped paying the tax. You’ve just postponed it. And whenever you take money out of your traditional retirement account, you’ll owe income tax on every dollar you remove.

Remember that Uncle Sam is your partner!

It’s fair to say that whatever you have in your retirement account, you co-own with your Uncle Sam.

On the other hand, the equity (the cash value) of your whole life insurance policy is growing tax-deferred. And that growth is available to you in most cases income tax free, unlike the tax-deferred growth of an ordinary retirement account. In addition, all the cash value can be yours without the payment of income taxes (under current tax law). And when you die, the policy’s death benefit will be paid to your beneficiaries, again free of any income tax.

A balance sheet for John and Jane Doe, showing assets including $300,000 in retirement savings; and showing liabilities including $75,000 in deferred taxes.
Figure 2. Balance Sheet Showing Looming Taxes
This balance sheet reflects the taxes you must pay your Uncle Sam as you withdraw your retirement savings. Don’t overlook those!

So how can you say the money in your retirement account, whose income tax liability has simply been postponed, is worth the same amount of money you’ve built up in the cash value of your whole life insurance policy?

You can’t. If you have $300,000 in traditional retirement accounts – and if you want your balance sheet to be accurate – your balance sheet needs to have another item on the liability (“What I Owe”) side, called Deferred Income Taxes. If you’re in the 25% tax bracket, that liability is $75,000. See Figure 2.

A balance sheet for John and Jane Doe, showing assets including $300,000 in retirement savings; and showing liabilities including $75,000 in deferred taxes.
Figure 2. Balance Sheet Showing Looming Taxes
This balance sheet reflects the taxes you must pay your Uncle Sam as you withdraw your retirement savings. Don’t overlook those!

Deferred Taxes Can Reduce the Net Worth Shown on Your Balance Sheet

What does that $75,000 liability do for John and Jane’s net worth? It reduces their net worth by $75,000.

A balance scale showing $300,000 cash value in a life insurance policy "outweighing" $300,000 in a traditional retirement plan.
Figure 3. Which is worth more?

To keep things simple, let’s say you’re in the 25% tax bracket. That means that you owe 25% of the value of your $300,000 retirement plan to Uncle Sam. Uncle Sam gets $75,000. You only get $225,000.

But if the $300,000 were the cash value of a whole life insurance policy, not a traditional retirement plan, you could typically get your hands on the cash income tax-free, under current tax law.

Your Favorite Uncle gets $0.00, and you get the entire $300,000. Which would you rather have?

A balance scale showing $300,000 cash value in a life insurance policy "outweighing" $300,000 in a traditional retirement plan.
Figure 3. Which is worth more?

Your Family May Get Stuck Paying Some or All of Your Deferred Taxes

If you die before you’ve withdrawn all the money from your traditional retirement account, what’s left will go to your beneficiaries – and Uncle Sam will look to them to pay the income tax you owe. In addition, your family may have to pay estate tax on your retirement money they inherit.

Your Life Insurance Cash Value Increases the Net Worth Shown on Your Balance Sheet

What if you had a Bank On Yourself-type cash value whole life insurance policy? Well, first, you wouldn’t have that liability called Deferred Income Taxes, because there aren’t any!

Second, you’d have a cash value that is an asset (something you own). In this example, your cash value is $300,000.

A balance sheet for John and Jane Doe, showing assets including $300,000 in life insurance cash value; and showing liabilities.
Figure 4. Balance Sheet Showing Life Insurance
This balance sheet reflects the value of your life insurance policy cash value as an asset.

To make your balance sheet more accurate, you need to add an item to the asset (“What I Own“) side, called Life Insurance Cash Value. See Figure 4.

Now compare Figure 1 with Figure 4. The numbers on both balance sheets are identical. Figure 1 shows your retirement savings of $300,000, while Figure 4 shows your life insurance cash value of $300,000.

But remember, we showed earlier how Figure 1 shows an incomplete snapshot of your liabilities – what you owe – because it doesn’t include the taxes you’re going to have to pay on your retirement savings as you draw the money out of your account.

Figure 2 shows the whole picture, including both your retirement savings and the taxes due.

And Figure 4 is a much better-looking balance sheet than Figure 2, because with life insurance, you can arrange your cash value withdrawals so there is no income tax due, under current law.

A balance sheet for John and Jane Doe, showing assets including $300,000 in life insurance cash value; and showing liabilities.
Figure 4. Balance Sheet Showing Life Insurance
This balance sheet reflects the value of your life insurance policy cash value as an asset.

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When your family inherits your traditional retirement account, they’ll owe taxes on the money

And it should go without saying that when you pass away and your family inherits what’s left in your retirement account, they’ll have to pay income tax on the money. But if you have a life insurance policy, your beneficiary will receive the death benefit of the policy – which could conceivably be three or more times greater than the cash value – with no income taxes due, under current law!

Without updating your balance sheet – by adding a deferred tax liability if you have traditional retirement plans, and by adding a life insurance cash value asset if you have cash value life insurance – your balance sheet simply isn’t giving you the whole picture.

Bank On Yourself-type life insurance policies don’t have hidden taxes to lower your net worth. They do have cash value that raises your net worth! To learn more about Bank On Yourself, get our Free Special Report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future. See how you can improve your balance sheet with Bank On Yourself!

Get Your FREE Report!

Get instant access to the FREE 18-page Special Report that reveals how super-charged dividend paying whole life insurance lets you bypass Wall Street, fire your banker, and take control of your financial future.

A Third Problem with Your Balance Sheet: Your Assets – Even Your Retirement Account Values – Are Only Estimates

Your balance sheet shows the estimated worth of your assets if you could sell them today at fair market value. Your balance sheet does not tell you what they would be worth if the market tanks, or even if it soars. It can’t! It’s not a prophet – even if it does help you determine your “profit”!

For that reason, take your balance sheet with a BIG grain of salt. We’ve had two market drops of 50% or more since 2000. Could it happen again? I’m not a prophet either. But I certainly wouldn’t bet against it.

The Right Kind of Life Insurance Policy Can Make Many of These Tax Issues Go Away

Bank On Yourself-type life insurance policies are high cash value whole life insurance policies, which give you significantly greater cash value, particularly in the early years, than traditional whole life insurance policies – without losing any of the tax advantages.

You’ll sleep better at night with assets that are guaranteed – like the high cash value life insurance policies preferred by Bank On Yourself Authorized Advisors. Using the Bank On Yourself strategy, you can know what the minimum guaranteed cash value of your policy will be on the day you retire, and at any point along the way.

To find out more, request a FREE, no-obligation Analysis. You’ll receive a referral to an Authorized Advisor (a life insurance agent with advanced training on this concept) who will show you more reasons why adding a Bank On Yourself-type life insurance policy to your retirement strategy may be a very good idea.

Congress Considers Axing Your 401(k) Tax Deduction

Congress is considering proposals right now to take away the tax advantages of your 401(k).

To help finance the tax reforms being proposed, Congress is eyeing axing the up-front tax deduction for 401(k) contributions. And one proposal would also change the tax-deferred nature of 401(k)s by imposing a 15% tax on your annual gains.

Why would Congress consider tinkering with the tax benefits of such a popular program as the 401(k)?

For the same reason that notorious holdup man Willie Sutton gave for robbing banks:

Because that’s where the money is!”

The current taxation of 401(k) plans was estimated to have cost the federal government more than $90 billion in potential tax revenue last year alone, according to the Joint Committee on Taxation. [Read more…] “Congress Considers Axing Your 401(k) Tax Deduction”

Why Does Ted Benna, the “Father of the 401(k),” Love the “501(k)” Plan?

The man widely credited as the “Father of the 401(k) Plan,” Ted Benna, is among those saying the plan is no longer a good way to save and invest for retirement. He cites concerns that the government may change the rules, and not in your favor; that an impending market crash will wipe out much of what you’ve saved for your retirement; and that staggering fees can eat up a large portion of your nest egg.

Benna has gone on record as endorsing something that has been creatively called a “501(k) Plan.” Don’t get distracted by the name “501(k).” Although “401(k)” refers to the section of the Internal Revenue Code that deals with retirement plans, “501(k)” is an obscure Internal Revenue Code reference that describes the educational status of certain child care organizations! Using “501(k)” to refer to some kind of retirement plan is a gimmick dreamed up by Madison Avenue types. But all they did was take the Bank On Yourself concept, which is a proven 401(k) alternative, and give it a mysterious new name, the “501(k),” hoping you’ll pay money to find out what they’re talking about.

But while others are charging you money for this information, we’ve been giving it away for years! For FREE information about the Bank On Yourself method that others call a “501(k),” download our free report, 5 Simple Steps to Bypass Wall Street, Beat the Banks at Their Own Game and Take Control of Your Financial Future here.

History of the 401(k) Plan and Ted Benna’s Contribution to It

[Read more…] “Why Does Ted Benna, the “Father of the 401(k),” Love the “501(k)” Plan?”

Is “Tax-Free Retirement” Too Good to Be True?

Tax-free retirement—living a comfortable life in retirement without the obligation to pay income tax—comes as the result of planning and arranging your finances (following IRS guidelines every step of the way) so that when you retire, none of the money you receive is taxable—perhaps not even your Social Security income.

Tax-free retirement is good, and this article reveals how to make it happen.

Is Avoiding Taxes on Your Retirement Income Legal?

Reducing or avoiding taxes is perfectly legal. People take steps to reduce or avoid taxes all the time. They may donate to charity to avoid paying as much tax. They deduct their mortgage payments. They take legitimate business deductions. They may shift medical expenses, hoping to bunch expenses into one year and exceed the threshold for deductions that year. These are just a few of the legal tax-avoiding measures Americans take every day.

Many people even believe they have an IRA or a 401(k) to avoid paying taxes. But that’s a trap, because traditional IRAs, 401(k)s, and most other government-controlled retirement plans do not allow you to avoid paying taxes. They merely postpone tax day. We’ll talk more about that in a few minutes.

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands.” — Supreme Court Justice Learned Hand

So while avoiding taxes is legal, evading taxes is not. Maybe you don’t report your income. Maybe you take deductions you’re not allowed. Or maybe you just tell the IRS to take a hike. That’s tax evasion.

But make no mistake: A tax-free retirement can be achieved legally, using IRS-approved methods.

Ways to Avoid Income Tax in Retirement

[Read more…] “Is “Tax-Free Retirement” Too Good to Be True?”

The Truth About Whole Life Insurance and Why It’s More Than a “Rich Man’s Roth”

I came across an online article by an anonymous blogger who claimed that the only good purpose for whole life insurance was as a rich man’s Roth. He was certain whole life insurance was only for individuals whose high incomes made them ineligible for the tax-saving advantages of a Roth IRA.

That’s actually pretty funny. Why restrict the incredible advantages of whole life insurance—including the tax advantages—only to the wealthy?

Let’s look at how a Roth IRA works and then compare it to a Bank On Yourself-type whole life insurance policy.

How Does a Roth IRA Work?

A Roth Individual Retirement Arrangement (Roth IRA) is an IRS-approved strategy that allows you to invest money you have earned by making contributions to a Roth IRA plan you have set up. You are not allowed to take a tax deduction for your contribution as you are with a traditional IRA. However, none of the money you take from your plan in the future is taxable. As far as the money in your Roth IRA is concerned, you will not be affected by future changes in the tax rate.

How a Roth IRA differs from a traditional IRA

Roth IRAs are quite different from traditional IRAs.

Chart Comparing Key Differences Between Traditional And Roth IRAsWith a traditional IRA, your contributions are tax-deductible. However, when you withdraw money from your traditional IRA—and you must withdraw specific percentages annually, beginning soon after your seventieth birthday—you must pay taxes on everything you withdraw—at whatever the tax rate happens to be at the time.

See the table for a summary of the key differences between a Traditional IRA and a Roth IRA. [Read more…] “The Truth About Whole Life Insurance and Why It’s More Than a “Rich Man’s Roth””

Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds

Bill Williams is an enthusiastic believer in the Bank On Yourself concept because of how it has helped his family financially. He wrote to me several years ago, and I included his letter on page 228 of my 2014 New York Times best-selling book, The Bank On Yourself Revolution:

Thanks for all the good things you are doing, Pamela. I am working with my Bank On Yourself Advisor to set up my third policy, and I am so appreciative of her guidance and expertise. She has been tremendously supportive.

The real “snake oil” is all of the purported advice about savings and investing we have been fed by the “experts” in the past. I get so upset by the advice to invest with before-tax dollars into 401(k)s or 403(b)s.

I’m over sixty years old and know when I turn 70½, I’m going to have to take required withdrawals from my plans and have the added burden of paying taxes on them. After all, the IRS wants to get its hands on the taxes they let me avoid paying all those years.

I wish not only that I had learned about Bank On Yourself earlier, but that the concept could be taught to the masses when they are young enough to get the maximum benefit from it.

Here’s why I say that: I think of all of the purchases I’ve made through the years where Bank On Yourself would have been a much better means to fund them. As an example, my son’s college expenses, which I paid every cent by selling stock and mutual funds and taking a loan from a 401(k).

Needless to say, my son received a great education (to his credit), but dear old dad has nothing to show for it. I had to put money into the stocks, 401(k), and mutual fund, so I had the resources—which could have been so much more powerful in a Bank On Yourself policy! It’s as simple as that. If I had done that, I would now still have the policies, which would have even more value.

I am depleting an IRA to fund my third policy and to help fund my first two Bank On Yourself-type policies. I just hope I live long enough to enjoy all the benefits.

Bill Williams writes again, about Bank On Yourself, tax-free retirement, and dividend-paying whole life insurance

[Read more…] “Bill Williams’ AHA Moment: How Bank On Yourself Freed Him from 401(k) Loans and Mutual Funds”

The Ticking Tax Time-Bomb of Conventional Retirement Plans

One of the biggest selling points of 401(k) and IRA retirement plans is that the money you put into them isn’t taxed right away. Bring out the bubbly to celebrate, right?!

Not so fast.

First of all, some people – hopefully not you! – mistakenly believe money placed into these retirement plans is “tax free.” It isn’t. It is “tax deferred,” meaning that you will pay tax on that money when you withdraw from your retirement plan down the line.

Deferred taxes might sound good, but deferring your taxes is like putting off a visit to the dentist. The problem compounds and will only get worse.

Deferring taxes creates a dangerous potential tax time bomb because you don’t have the answers to two critical questions…

First, what will the tax rates be when you retire? And what will they be 20 or 30 years later?

[Read more…] “The Ticking Tax Time-Bomb of Conventional Retirement Plans”

The good, bad and the ugly of the new myRA

You’ve probably been hearing about the new “myRA,” a new government-run retirement account that President Obama unveiled at his State of the Union address and plans to create with a stroke of his pen.

Obama State of the Union Address

Its primary purpose is to offer a savings option to the 50% or so of U.S. workers who have no access to employer-sponsored retirement plans and have little saved for retirement.

Obama State of the Union Address

The appeal is that it “guarantees a decent return with no risk of losing what you put in,” according to Obama.

Sounds okay so far, right?

I did some digging into the details to understand more about how this program will actually work… and to help you sort through the pros and cons of programs like this.

Below I’ve listed the good, the bad, and the ugly about this new program. But really, most of the bad and the ugly points apply to all government-run retirement accounts, including 401(k)’s, 403(b)’s, IRA’s, etc. So if you have one of these plans, I urge you to read this today.

The good…

[Read more…] “The good, bad and the ugly of the new myRA”

Are you putting your retirement savings in prison?

Ted Benna, "Father of the 401(k)"

Ted Benna is known as the “Father of the 401(k).” In the late ‘70’s, he worked as a consultant to business owners whose main agenda was “How can I get the biggest tax break, and give the least to my employees, legally?”

Ted Benna, "Father of the 401(k)"

Tax nerd that he was, Benna discovered an obscure part of the tax code – section 401(k). Voila! By 2012, nearly 75% of all company pension plans had disappeared!

What does Mr. Benna say about his beautiful 401(k) baby today?

If I were starting over from scratch today with what we know, I’d blow up the existing structure and start over!”1

Uh oh.

Per the US Senate Committee on Health, Education, Labor, & Pensions: “After a lifetime of hard work, many seniors will find themselves forced to choose between putting food on the table and buying their medication.” The U.S. Census Bureau says the average value of 401(k) accounts of pre-retirees between 55 and 64 is only $170,645; the average value of their IRAs is only $147,345. And half of all those close to retirement age have less than $50,000 in these plans.

Something went horribly wrong. Actually, several things went horribly wrong, not only with 401(k)’s but also their kissing cousins: IRA’s, Roth Plans, 403(b)’s, SEP-IRA’s and so on.

And the problems with these government-controlled plans are in these five key areas:
[Read more…] “Are you putting your retirement savings in prison?”