Paying little to no taxes is what drives the majority of people when choosing which retirement accounts to invest in. To ensure they’re reaping the best benefits possible, a lot of individuals put their money into both qualified plans, like the 401(k), and an IRA.
Regardless of how vigilant you are with how and where you are building your nest egg, Uncle Sam will always want his share. I hope I’m not revealing anything shocking, but all qualified plans were created with an incentive that favors money going back to the government.
401(k)s for instance, were promoted to inflate the amount of money traded by companies in the stock market – the more money traded, the more opportunity available for companies (and the government) to earn more money.
Companies making money from the stock market is not a bad thing; but if making that money means sacrificing an individual’s retirement nest egg, then it should raise your red flag. Just as business entities and the government are always looking out for themselves, the average American should also look out for themselves to ensure their livelihood during retirement.
Here is a brief breakdown of the well-known and popular retirement plans:
IRAs – Traditional and Roth
The tax benefits and contribution rules for IRAs can be just as constricting as a 401(k), but is still a better alternative to most qualified plans.
The main difference between a Roth and Traditional IRA is when you get taxed. With Traditional, you get taxed on the back end, and with a Roth you get taxed on the front end.
Most advisors help individuals determine what plan is best for them by forecasting what possible tax bracket they will be in during retirement. People assume that their gross expenses will decrease during retirement as their children have grown up and their house might be paid off, but that doesn’t mean you are going to be in a lower tax bracket. The write-offs and tax credits may be less during retirement, this may mean you’ll get taxed more, though you’re receiving less of an income.
The 401(k)
“Free money” is a myth. Companies are not required by law to match 401(k) contributions, but do so to incentivize their employees to contribute to the plan. (Remember, your company trades your retirement money on the stock market for profit, so they make contributing to a 401(k) attractive).
It’s rare that companies match dollar for dollar, but if they did, you are still not going to come out ahead. If you put $5 into your plan, and your company matches you $5, you now have $10 saved for retirement – simple enough, but let’s keep doing some math. You contribute $5 again, and you now have $15 saved for retirement, but your company won’t match you at $15, they match you at $5. So you’re at $20. You put in another $5, which puts you at $25, but your company’s $5 match means your account is at $30 and not $50. Make sense?
The more your account grows the less amount of money your company contributes. Not to mention that most companies cap contributions anywhere from 3%-6% of an employee’s salary. Add inflation, taxes, and distribution limitations, and your 401(k) just shrunk.
You might at least have some money for retirement if you used a 401(k), but after all those years of saving you basically gave your company money for stock market trading. And the government, to ensure companies have money to trade (which they’ll tax), mandate at what age you can start receiving your savings.
Whole Life Insurance
Using Whole Life Insurance for retirement means you get money when you want, tax-free growth, and you earn interest. If you’re saving for retirement anyways, consider saving into a Whole Life Policy.
Instead of the government, or a company, dictating when and how to use your nest egg, a whole life policy gives you complete control – not to mention builds your net worth.
A whole life policy is a private contract between you and a mutually owned insurance company. Your money inside of a policy grows tax free, you receive a steady rate of return, and you receive a death benefit. Though dividends from a mutual insurance company are not guaranteed, it’s unlikely they are not given. During the Great Depression life insurance companies were among the only companies to still pay their owners dividends.
Whole Life Insurance also gives you, if properly structured, tax-free liquidity. This liquidity can be accessed at any time and for any reason. During retirement, you can use your cash value to live on, or invest in other performing assets.
With Whole Life, you’re not only efficiently building and utilizing your nest egg, you’re also leaving your family with a legacy.
Reshape Your Retirement
When it comes to your retirement it’s a dog eat dog world. Your company isn’t looking out for you and neither is big brother. Look into what a Whole Life Policy can do to reshape your retirement.
