Qualified Plans

Qualified retirement plans remain a mystery even to those who blindly believe in their purpose. It is commonly understood that these plans will create great amounts of money for retirement and, at the same time, save taxes for everyone who participates in them. The government, CPAs, accountants, news media, financial planners, banks, investment brokers, benefit managers, and yes, even your parents will tell you that this is true. But the truth today is an elusive commodity.


The truth is that a qualified plan (401(k), IRA, SEP, etc.) only does one thing. A qualified plan simply defers the taxes due to a later date, and possibly, just possibly, defers the taxes due to a higher tax table. Understanding the demographic shifts and the continuous over-spending of the government and its uncontrolled debt, it is logical to believe that taxes must go up in the future if our country is to survive.


If I could tell you the exact day that your retirement account will suffer its greatest loss, would you want to know that day? Then, in having that information, if you could do something now to prevent those losses, would you do it? You see, the day you retire and start receiving income from these accounts is the day your retirement accounts will suffer their greatest losses due to taxes.


As a bit of light humor, I ask younger workers who are involved in 401(k)s this simple question: "When you were filling out the paperwork for your 401(k), did you check the 30% or the 40% guaranteed loss box?” They give me a puzzled look. I tell them, "You see, when you retire, this account could be taxed 30% to 40% guaranteed, regardless of whether your account goes up or down in value.”


Seriously though, the average 35-year-old worker who has been in the workforce for 10 to 12 years has experienced down or flat markets more than 50% of their working years. These people, in the future, will be confronted with record levels of taxation. For anyone planning to become successful in the future, the idea of deferring withdrawals of money to a later date only to have it taxed at a higher rate is crazy. If you are going to retire to a lower tax bracket, then, by all means, use a qualified plan to fund your retirement. You could realize an actual tax savings. The problem is, I believe, everyone’s taxes will go up in the future, rich or poor.


-Leonard Renier

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