In 1978, when the highest marginal tax rate in the United States was 70%, and companies were eliminating corporate pensions, putting greater responsibility on workers to be responsible for their own retirement, the IRS instituted 401(k) retirement plans. These plans allowed a worker to contribute a portion of his/her income from each paycheck to an account (usually in the stock market) before taxes were taken out. The money could grow tax deferred until retirement (after age 59 ½), and income tax would be paid on the amount withdrawn. Initially, most companies would match all or at least a portion of the employee’s contribution.
The reality has been far from the expectation. First, even with the modest inflation rate of 3% we have experienced over the past 30 years, prices will have quadrupled during your working years. A commodity costing $10 at age 25 will cost around $40 at age 65. This means it would cost four times the amount to retain the same life style at retirement as it did in your twenties. Second, the tax rate has come down and instead of paying less taxes at retirement, most people will be paying higher taxes. Instead of paying the taxes on the smaller amount of the money invested, they are paying taxes on the original contribution plus the growth.
The reality has been far from the expectation. First, even with the modest inflation rate of 3% we have experienced over the past 30 years, prices will have quadrupled during your working years. A commodity costing $10 at age 25 will cost around $40 at age 65. This means it would cost four times the amount to retain the same life style at retirement as it did in your twenties. Second, the tax rate has come down and instead of paying less taxes at retirement, most people will be paying higher taxes. Instead of paying the taxes on the smaller amount of the money invested, they are paying taxes on the original contribution plus the growth.
Would you rather pay taxes on the seeds (investment), or the harvest (investment plus growth)?
The following tables compares a tax deferred retirement account (401(k) (or IRA, 403(b), or 457 plan) to The RAFT Strategy (The Retirement Account Free of Taxes). This investment is made with after-tax dollars, grows tax deferred and at retirement may be taken out tax-free. It also does not have a penalty for withdrawing funds prior to age 59 ½ , and it does not require funds to be withdrawn beginning at 70 ½ . This investment is through the use of a type of life insurance product called Indexed Universal Life.
Comparison of Tax Deferred Plans vs Retirement Account Free of Taxes (RAFT)
The following examples are based on the following criteria: A male non-tobacco user aged 30 in good health, planning on retirement at age 65, and living to current predicted actuarial age of 85. Your specific situation will differ based on your current age, age at retirement, and time of death, but your results will be similar.
The following examples are based on the following criteria: A male non-tobacco user aged 30 in good health, planning on retirement at age 65, and living to current predicted actuarial age of 85. Your specific situation will differ based on your current age, age at retirement, and time of death, but your results will be similar.
Regardless of your age or what stage you are in your working career, I can help you start a tax-free retirement plan. If you have not already started a tax-deferred plan, it is not too late. A tax -free retirement can be integrated with your current plan.
For a free consultation and to learn more about tax free retirement options, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.
For a free consultation and to learn more about tax free retirement options, please contact me at 909-714-1830 or at russ@russmorrisfinancial.com.
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