Do you realize that you have a huge potential tax burden sitting in the background right now and it will jump on you when you can least afford such a burden? Well, you do. In fact, most of you have this and you think it is a real plus. On the surface, it appears to be a big tax savings but, when you dig a little deeper, you will see what I have uncovered for you. In fact, it is a potential liability that could cost you and your family over $1,000,000! What is this potential problem called? Believe it or not, but it is a qualified retirement plan. Yes, retirement plans. Pension, profit-sharing, 401-k, SEP, IRA, all of them.
The IRS tells you how much you can put into a qualified retirement plan for yourself, and how much you must put away for your employees, even the ones that don’t deserve it. The IRS decides when that money belongs to the employees and will give it all to them in three to seven years. Now, does that make you happy?
The IRS also decides when you can get to your money. Retire before age sixty and you just gave the IRS 10 percent more of your money. If you touch any of your money prior to age 59½, you must pay taxes on it plus a 10 percent federal penalty. You must also start using your money by age 70½, and you must pull out an amount based on your life expectancy, or you get hit with a 50 percent tax on the amount not distributed. Administrative charges can also be from a few hundred dollars to a few thousand each and every year. Best of all, the IRS changes the rules almost every year just to confuse everyone. Want to hear more? At your death, the estate taxes and fees can eat up as much as 60 percent of your plan. That should make you even happier.
Here is how a qualified plan works. Dr. Greenfield sets up a qualified plan and contributes $15,000 per year for thirty years to age sixty-five. He earns 8 percent on the money and, at age sixty-five, has over $1,800,000. If he take out just 8 percent per year, that is $146,815. He must now pay taxes on that and we will assume that he is in a 30 percent tax bracket, which means he owes the IRS $44,044, leaving him a net retirement income of $102,771. Based on these numbers, how long will it take the IRS to get back all the taxes he saved by having a qualified plan? Dr. Greenfield put in a total of $450,000 ($15,000 per year for 30 years = $450,000). At a 30 percent tax rate, he saves a total of $135,000. Dr. Greenfield is going to pay $44,044 in taxes each year, so the IRS will get back all the taxes he saved in a little over two years! If he lives to age one hundred, the IRS will be smiling with a total tax of $1,541,540! That is a nice “income” for the IRS!
Is there a way to put money aside and not pay all those taxes to the IRS?
Yes, there is. It may surprise you but you can do it with a life insurance plan. Yes, I said life insurance: that stuff that everyone has been telling you is a bad investment. With life insurance, the premiums are paid with after-tax dollars, like the Roth IRA. Let’s use the example of the same $15,000 that was going into the qualified plan. At a 30 percent tax bracket, you would need to have $21,430 to end up with the net after taxes of $15,000. The money goes in and, since it is a life insurance policy, you pay no taxes on the growth within the policy. So, if you pay the tax for thirty years at $6,430 per year, the total is $192,900.
Let’s use the same figures that we did for the qualified plan. A doctor is age thirty-five and makes an annual “net after-tax” deposit of $15,000 for thirty years to age sixty-five. We will use the same rate of return of 8 percent.
The qualified plan gave an annual yield of $146,815 before taxes with a net after taxes of $102,771. The insurance plan will yield over $189,000 per year, net, tax-free for life! It beats the qualified plan by $86,229 per year. The policy starts with a death benefit over $1,000,000. By the way, the IRS cannot tell you how much you can or cannot put into this policy for yourself, and it also cannot tell you that you must also put an equal amount away for each and every employee. In fact, they have no say-so when it comes to this plan. Now are you happy?
You can get to this money prior to age 59½ without any tax liability and also structure a stream of cash to cover your retirement needs that is totally sheltered from any income taxes. This plan works just like the Roth IRA, but it gives you the ability to put away a lot more money. In other words, no income taxes to pay on the accumulation, no income taxes or penalties to pay on the withdrawals, and no contributions for employees and no IRS involvement. Are you smiling now?
You should be!
Stanley B. Greenfield has been engaged in the fields of Financial Management and Insurance since 1962. He has been a guest speaker for Educare Financial on numerous occasions. He is a Registered Financial Consultant, and was awarded the designation of RHU, Registered Professional Disability and Health Insurance Underwriter, in 1979, as one of its Charter Members.
Mr. Greenfield also serves as a member of the Board of Directors of the Florida Chiropractic Foundation for Education and Research. You may reach him at [email protected], call 800-585-1555 or visit his website, www.stanleygreenfield.com.