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?
You don’t know, do you? That’s because nobody knows! Tax rates have gone up and down radically over the years.
The top tax rate in 1913 – the year the income tax was introduced – was just 7%. But in 1944, the top rate was 94%. So what will the tax rates be when you are forced to start paying taxes on your retirement plan withdrawals? Let me just dust off my crystal ball. . .
Most people we talk to believe taxes are going to have to go up to cover the nation’s mounting debt, and our aging population and growing entitlement programs such as Social Security and Medicare.
The second critical question is: What will your retirement plan be worth when you retire?
Will you have lost your shirt and be subsisting on beans for the duration? Or will you have made a killing and be living the sweet life? With a conventional retirement plan tied to the unpredictability of the markets, the truth is that you have no idea.
But let’s assume that you’re successful in growing your nest egg. And let’s assume that most people are right about tax rates going up. That means you’ll end up paying higher taxes on a bigger number! And that means you’ll end up paying much more in taxes down the line when those deferred taxes come due.
In fact, many retirees we survey say they’re paying some of the highest tax rates they’ve ever paid!
And once you turn 72 years old, the government forces you to withdraw money from your conventional retirement plan every year – whether you want to or not – and pay taxes on it.
Those withdrawals are called required minimum distributions, or RMDs. Those RMDs are considered part of your income. And that RMD income may cause you to pay higher taxes on your Social Security income. It can also raise your Medicare premiums.
One person posted this comment on our blog:
My father-in-law has an IRA like millions of other Americans. Because of his required minimum distributions, he is now paying taxes at the HIGHEST rate in his 84 years! These qualified (aka conventional retirement) plans are a scam!”
The government and Wall Street want you to believe you’ll be in a lower tax bracket in retirement. But the fact is that if you’re in a lower tax bracket in retirement, it means just one of two things. Either you’re poor – probably not what you had in mind …
Or you’ve been wise enough to use a tried-and-true retirement planning strategy to shield your income from the ticking time-bomb of deferred taxation.
Among its many other advantages, with a Bank On Yourself–type plan as part of your retirement planning, you can take retirement income without taxes due under current tax law. It’s similar in that regard to a Roth plan.
Since you’ve already paid taxes on the money you put into your Bank On Yourself plan at today’s rates, you won’t have a big, unpleasant surprise later. Your plan is guaranteed to grow by a larger dollar amount each year. And you’ll know exactly how much you’ll have in your retirement nest egg – guaranteed – when the time comes.
So Let’s Recap the 6 Pitfalls and Traps of Conventional Retirement Plans:
- No guarantees and lots of risk
- High fees that erode the nest egg you’re trying to build
- Unqualified administrators and financial representatives who get paid no matter how poorly they perform
- Government restrictions and employer regulations that leave you with no control over the money in your plan
- No ability to access your money without restrictions and penalties if you need it before retirement
- The ticking time-bomb of deferred taxes
Time to rethink your retirement planning? Want a better alternative that is tax advantaged, guaranteed, predictable, safe and liquid? Then get the details of how Bank On Yourself can help you plan for a secure retirement, while gaining control of your money and finances.
FREE REPORT REVEALS A BETTER WAY TO PLAN FOR RETIREMENT
The Bank On Yourself method has never had a losing year in more than 160 years. It provides an unbeatable combination of benefits, which include safety, predictability, liquidity, guarantees and control, plus some juicy tax advantages.