Should you Participate in Your Employer’s Qualified Plan or Any Other Government Sponsored Qualified Plan? Will they erode your retirement money!
Here’s a Qualified Plan Quiz:
This is the quiz we give to our continuing education class for CPAs:
1. Is a qualified plan a tax savings event? (No, it only postpones the taxes on your plan)
2. What is the only guarantee of a qualified plan? (You pay all the fees)
3. What tax bracket will you be in at retirement? (Who knows, the government controls this variable)
4. Will taxes be higher or lower in the future? (Probably much higher)
5. Should you over-fund your retirement plan? (Never!)
6. Who pays all the hidden fees & takes all the risk in your qualified plan? (You do!)
7. What deductions will you have available when you begin withdrawing your funds? (Very Few)
8. When is the best time to take money out of your retirement plan? (As soon as possible)
9. How liquid is your money inside your qualified plan? (Very little, if any, liquidity)
10. How large will the tax-lien be when you retire? (Who knows?)
11. Should you ever have a tax-deferred annuity inside your retirement plan? (Absolutely!)
12. If you should lose 40%, as it happened twice in the last decade, what rate of return must you earn just to get back to even? (66.7%, and will you have the time to recoup your losses)
13. What is your exit-strategy when you begin withdrawing money from your plan? (The IRS decides this)
The Triple Ten Tax Trap:
Let me give you a good example as to why the government is interested in the future calculations of your retirement plan. I call this my 10, 10, 10 theory!
Let’s pretend you are age 40 and you invest $10,000 each year for 10 years @ 10% rate of return = $175,311.
Let’s assume that you are in a 40% Fed & State tax bracket, so you will be paying a total of $70,124 in taxes. This leaves you with $105,187. So really, whose retirement plan are you building? This assumes you are not paying any management fees.
Remember, you are the only one taking all risk, paying all the fees and your money is not liquid. What if you only earned 9% and were having to pay a management fee? Should you be concerned? I would think so!
Case Study #1
Here’s an employee, age 35, who has changed jobs and is rolling over $100,000 from his previous 401k to his new employer’s 401k plan. His employer is going to match 50% up to 2% of the client’s annual salary of $150,000, which would be $3,000 annually of free money added to the employee’s retirement account.
The employee is wanting to deposit $17,000 each year into his retirement plan. This would max out the amount placed into the plan and would allow him to tax-defer $4,250 each year.
The employee has been told by his Human Resources (HRM) manager that he should earn an average rate of return of 6% on his retirement account. He plans to work until the end of age 65 or for the next 31 years.
The HRM projects the employee’s retirement account including the employer’s match should be approximately $2,271,771 at the end of the employee’s 31 years of service.
The HRM then shows the employee how the plan gets much sweeter because the employee can defer $508,619 in taxes that he would have been paying the IRS. (This number is incorrect as I will prove later on in this report.)
The employee’s heart is filling with excitement because he had never dreamed he would have this much money when he retires. However, remembering what his mother had taught him, “if it looks too good to be true, better do more research and get a second opinion”.
The employee remembers hearing us on KURM 790AM, and that I was sharing with my radio audience about the hazards of qualified plans.
After leaving the HRM’s office he went straight home and made a very wise decision, he called our office to schedule a time for us to meet.
He and his wife came to our office located at Village on the Creeks in Rogers, Arkansas. He shared with me all the information and projections given to him by the HRM. After reading his employer’s 401K plan document, I gave the employee and his wife some eye-opening truths concerning qualified plans.
The following is what I discovered when I factored in the 2% management fee which was listed in the fine print within the pages of the 401k plan document. This small fee totaled $419,978 over the 31year period employment and reduced his retirement account from $2,271,771 down to $1,466,566. That’s a 36% decreased or a loss of $829,632, in real money!
The employee was not feeling so enthusiastic at this point, and it gets even worse when we finished all the math.
Not only did the management fees reduce his account by 36%, the tax-lien, if in a constant 25% tax bracket, would also reduce his account by an additional $542,731. The employee would end up with only $899,409 in his retirement account. Instead of earning 6% over all those years, his rate of return would drop to a low 3.31%. What will inflation do to his purchasing power?
He now begins to think aloud, “what if the market doesn’t earn 6% every year for the next 31years and what if my tax bracket goes up? He also understands how not having liquidity (access to his money) could really be a disadvantage for him and his family. In addition, he would need to buy term insurance to help complete his plan in the event of an early death. Could there be a better way to save for retirement?
Yes, the Private Reserve Strategy (PRS), using a well-designed, high-grade, dividend paying whole life insurance policy can be used to supplement Social Security and provide money you can’t outlive.
Follow the math:
a) If the employee pays taxes of 25% on the $17,000 of savings each year that would be $4,250. So, if he paid his taxes outside the 401K assuming his tax bracket never changed he would have only paid $131,750 plus the $25,000 on his original $100,000 from his previous employer’ plan. His total taxes paid to the U.S. Treasury (IRS) would be $156,750. Compare this to the $542,731 due upon withdrawals from his employer’s 401k.
b) He would also eliminate the $419,978 in management fees.
c) His liquidity would be approximately $77,229 from day one. He’s getting excited!
d) He would have over $2,000,000 in death benefit from day one.
e) His cash value would be growing 4 to 6% tax-free without having market risk to worry about.
f) And in 31years, he should have accumulated over $1,100,000 in tax-free retirement money,
g) Plus, he would have been covered with over $2 million in life insurance from day one.
So, why does the U. S. government encourage the American public to invest their retirement money into qualified plans? It is simple once you understand their motive. It’s against the law for the government to participate in the stock market. However, there is no law preventing them from riding piggyback on a person’s qualified account. They take no risk and pay no fees. They are using the participator’s money for their profit.
Now Please Understand:
The above employee was trying to earn a 6% rate of return each year in the market. However, when the fees and taxes were finished depleting his account he only earned 3.31% over the 31years time-period. And do you think he would stay in a 25% tax bracket? Probably not.
Again, all we need to do is the math. In this case the employee is tax-deferring $156,750 ($4,250 x 31yrs. + $25,000). This gave him a tax-deferral of $508,619 over the 31 years. However, after all the fees are deducted from the account and income taxes are paid as withdrawals are taken from the plan, his eventual tax-deferral is only $190,002 and his employer’s match had been reduced from $178,085 down to $67,060.
The employee’s annual rate of return has dropped from 6% down to 3.31% while the U.S. government’s rate of return rose to 6.07%. Beware of Greeks bearing gifts! There is no Free lunch.
Bottom-line: By riding piggyback on the employee’s account, the government, earned 6.07% while the employee was taking all the risk, paying all the fees, having little, if any liquidity, and the employee ended up earning only 3.31%.
I believe the math tells the whole story. It tells the Truth. By understanding how qualified plans truly work you can see how much further ahead a person can be by keeping his/her retirement plan private and under their personal control instead of the governments and Wall Street’s plan of action.
I hope you understand this special report, we should probably have a conversation.
Thanks for taking the time to read my special report on the hazards of qualified plans.
“Chastain Financial taking you up to and thru retirement”
Carla Chastain – Arkansas Insurance License #833309
Steve Chastain – Arkansas Insurance License #15284819
Chastain Financial- Arkansas Insurance License #100102794
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