If everything you thought was true about IRAs and 401(k)s turned out no to be true, when would you want to know?
There are two types of retirement plans in the United States, the qualified plan and the non-qualified plan. Qualified plans include 401(k)s, IRAs, SEPs, and 403(b)s. Non-qualified plans include annuities, 457(b)s, Roth IRA, and Roth 401(k)s. The basic difference between the two is that qualified plans allow participants to make pre-tax contributions, while non-qualified plan contributions are made with after-tax dollars.
A qualified plan is similar to a deferred compensation plan in that the participant is agreeing to defer receipt of current income in favor of payout at retirement, thus deferring the tax due on the that portion of the income into the future when the income is received. The logic behind this decision is based on the assumption that the participant will be in a lower tax bracket at retirement age.
To determine if a qualified plan is for you, click here to download our white paper entitled “Is Your IRA/401(k) a Ticking Time Bomb?”
If you’d like to understand more about how you may be affected by this or discuss other options that may exist for you please contact us at (619)994-1110.
Contrary to popular belief, these plans do not save taxes. They simply defer the payment of otherwise payable income taxes. I prefer to refer to them as tax postponement accounts. The IRS is not saying you do not owe the tax. They are saying you can pay the tax at a later date. But, at what rate will you pay the tax?
The IRS gives us choice and control as to how, when, or if we pay tax on our accounts. If we don’t understand that then we do what everybody else does and it can cost us a fortune.
These types of accounts not only defer the tax, they also defer the tax calculation. The IRS is not going to ask you what tax bracket you were in when you contributed the money to the plan. Their only concern is what bracket you are in at the time you withdraw the income. If you think you will be in a higher tax bracket when you retire you should consider other alternatives for your retirement savings. If you think you will be in a lower tax bracket when you retire a qualified plan may be a good option for you. However, you may wish to reconsider if the way you’re preparing for your financial future is in your best interest.
To determine if a qualified plan is for you, click here to download our white paper entitled “Is Your IRA/401(k) a Ticking Time Bomb?”
What do you think tax rates will be in the future?
- The same as today
- Higher than today
- Lower than today
Consider this:
- Our national debt is over $17 trillion and growing with no end in sight
- Social Security is rapidly going broke
- Medicare is in bigger trouble than Social Security
- 10,000 Baby Boomers per day are retiring and living much longer than previous generations
- Today, there are 3 workers contributing to Social Security per retiree compared to 16 workers per retiree in the past
- The government is now running healthcare
One thing is certain, tax rates do change over time. These retirement accounts are most often a great source for retirement savings and most people who have access to such accounts should consider using them, especially if you are getting a company match. The problem is in not understanding them.
To determine if a qualified plan is for you, click here to download our white paper entitled “Is Your IRA/401(k) a Ticking Time Bomb?”
If you’d like to understand more about how you may be affected by this or discuss other options that may exist for you please contact us at (619)994-1110.