When I got my first job out of college it was 1991. I heard about this great retirement vehicle called a 401 (k). Now, I really did not know what a 401 (k) was, but I was told to ask each company I interviewed with if they had a 401 (k). So I get my job with a small company in the Washington, DC area called Spirit Rent-A-Car, and they had a 401(k). They did not pay a very high salary, but they had a 401 (k) so I took the job.
As time went on I learned the value of a 401 (k). First they were matching up my portion up to a certain percent. It has been a long time since I worked there so I do not know the exact amount. For this discussion we will use 4%. FREE MONEY!, my favorite kind. Yeah! Then I find the real power was that you do not pay taxes on that income until you take the money, when you retire, so if you are not working you should be in a lower tax bracket. Wow, what a concept.
But then I found out that 401 (k) are investments in the market I was good with that, I like the market at age 22. Then, sadly I found out that 401 (k)’s can and do lose money. Well that kind of sucks, no one told me that when I signed up. Then the talked about the power of tax deferral and interest compounding, well that sounds great. And that still is a great benefit, but what our country is how much in debt?? Almost $17 trillion, well how did that happen? Why can’t I just go print my own money and call it a loan. I have a color copier, maybe I can print my own money. Well back to being serious. It poses the question.. In the future will taxes go up or down? It seems like they have to go up. How else can the government pay off a debt that high??
If I am going to be in a higher tax bracket, does it make sense to have a tax free account or a tax deferred account? It kind of depends on your age and your strategic plan, but you can get a totally tax free retirement and get the power of interest compounding over time, if you play the game by the right rules.
Believe it or not there are some vehicles you can put yourself into and retire with a tax free income. The Roth IRA is one example, since you are putting money in after taxes. Another way is with life insurance, WHAT DID YOU JUST SAY.. LIFE INSURANCE?? Yes, believe it or not you can use the IRS code of 7702(a) to build cash value in a life insurance policy and all of the loans are tax free. And you get a death benefit, which you do not get with a Roth IRA, some life policies have living benefits, which gives you access to part of the death benefit while you are still alive. Now here is the next best part, an Indexed Universal Life, your principal is guaranteed, so not only to you get the tax free income, you never lose money. What a concept.
What if you have already retired?? Ok well now that concept might not work, it could, but let’s assume it is not the right move for you. You still have that 401 (k) from your job that may or may not be making money. On the same concept as an indexed universal life, is an indexed annuity. Now on this concept you still never lose your principal. Here the power of tax deferral is also great, while you will pay tax on income when you withdraw the money, you may never need to withdraw from the account with the exception of the required minimum distribution (RMD). That deals with your qualified money, but a topic for a different day. With an annuity you would never run out of money, and only pay tax on the portion you used when you used it.