Are Tax-Deferred Retirement Plans the Best Way to Save?

{4 minutes to read}  Today, we are going to continue the conversation about retirement planning. As people begin to reach their 50s and 60s, they start thinking about how they are going to generate the income they need during retirement. One of the things that we provide is a report on Social Security and how you can make the smartest decisions regarding filing for yourself, or if married, for yourself and your spouse.

Today, however, I want to talk about where most people put their money during the period of time right before retirement. They usually put money into retirement plans; IRAs, 401Ks, profit-sharing plans, etc. Those plans are great for accumulating money since they are tax-deferred, but they actually may not be the best choice for all of your retirement savings.

Why do I say that? When you go to take money out of a retirement plan, all of the earnings and all of the principle will be taxed at ordinary income tax rates. Let’s look at a hypothetical scenario where a client who is in a 30% income tax bracket at age 55, puts $10,000 into a 401(k) plan. When they put that money in, they will have likely deferred the tax on $3,000 of the $10,000. However, let’s say that the $10,000 grew over time to $100,000. When the client withdraws that money, they would pay income tax on the entire amount.

Here is where it gets interesting: Many people will tell me that they are going to retire in a lower tax bracket. Well, that is all well and good, but I’d like you to click on this link to see The History of Taxes in America. It might be insightful to see that given the current economic conditions in the United States, where we have a very large deficit and many other issues over which we have no control, it is possible that we might actually retire in a higher tax bracket. Also, you may want to take a look at our 2019 Federal Tax Information update.

If we actually retired in a lower bracket, the qualified plan would work, but I’m not sure that is always going to be the case. How much we are going to pay on our retirement income will be determined by the government, based upon the current tax laws at that time.

Many times when people retire, their two biggest assets are their retirement accounts and their home. Neither of those two assets are going to generate tax-favored income during retirement. You can’t eat the drywall in your house and at some point, you are going to be in a position where all the income from your qualified plans is going to be taxable — not at capital gains rates but at ordinary income tax rates.

We see people with tremendous amounts of money in that type of retirement account, but there might be better alternatives available such as high cash value life insurance with long-term care, Roth IRAs, or regular brokerage/investment accounts that afford them capital gains treatment.

When it comes to retirement planning, having all your money in a retirement type account is not necessarily the wisest way to prepare. If you have any questions or would like more information on this topic, please give us a call.

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Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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