One of the common themes we see in financial planning can be somewhat of an oxymoron. Most people follow the tried and true advice to sock away as much money as they can into their retirement plans, like 401(k)s and traditional IRA's, but then find out it may not always be the best advice when retirement comes and Uncle Sam has his hand out.
Most financial advisors, even the celebrity ones, tend to agree that you should only take the employer match, then focus on reinvesting elsewhere to achieve a different objective. We often find that one of the largest misconceptions investors run into is having too much money in qualified retirement accounts, such as 401(k)’s and IRAs. Too much money?? Is there such a thing? Imagine that you’re retired and you’ve got a $10,000 vacation earmarked in your retirement savings account. All of a sudden, you realize you could have to take out $13,000 to pay for it instead. Think about that on a larger scale for a new car, then consider it for your living expenses every month for the next 30 years!
While it may sound great, and many TV commercials may lead you to believe, that you could have $500,000 - $1,000,000 or more in retirement accounts, this may also become a “ticking tax bomb” in your later years. It may not feel like it, but currently, taxes are on sale! Marginal tax brackets are currently the lowest they have ever been for many savers and while putting away as much money as possible in retirement accounts may sound like a good plan, it could substantially hinder your retirement income. What do I mean by this?
There has been a rule of thumb for decades that you could withdrawal 4% per year off of your investment assets throughout your retirement years and your savings should last. While this percentage is debatable (another article), then the current standard tax deduction of $12,000 per taxpayer ($24,000 – married, filing jointly) would deem that $300,000 per taxpayer ($600,000 jointly) is the maximum amount to have in qualified retirement accounts before the withdrawals become taxable. You mean to say there is such a thing as too much in retirement accounts?? Yes! If you want the IRS check out of your retirement, there are some important planning rules to follow. Having retirement pension income would make this amount less.
In our opinion, kicking Uncle Sam out of your portfolio may have much more of a beneficial effect on your lifetime income planning than chasing the difference of say 7% or 8% with your investments in the market. For this planning, we like to not only diversify client’s investments, but also future income streams. Considering Roth IRA conversions in lower income years or maximizing conversions before you reach the next tax bracket may be advantageous. Roth IRA funds are never taxed again once they are contributed and remaining balances could even be stretched out tax-free over your child’s life as well.
If you earn too much income to contribute to a Roth IRA, or if $5,500 ($6,500 over age 50) isn’t likely enough savings for the tax-deferred accumulation and future tax-free income, a properly designed and funded life insurance policy could be designed to mimic many of the same tax-advantages of a Roth IRA. This is typically used as an alternative supplement to retirement income with less overall investment risk. This could be a permanent whole life policy or preferably a maximum funded fixed-indexed universal life insurance policy. We believe it is important to work with an experienced professional as these plans can vary greatly on costs and benefits. They have no contribution limits or income limits when designed properly.
With proper proactive income planning, many consumers could be able to design a tax-advantaged retirement with a 0% tax bracket, others could plan to be in the bottom tax brackets, given enough time to implement educated planning. If you’re curious as to what a comprehensive, tax-advantaged plan might look like for you, please reach out to me at Advanced Wealth Strategies (704) 450-8352 located at 19520 W. Catawba Ave. Second opinion reviews can be important for peace of mind, they are always complimentary to get you on the right track to put Uncle Sam in his place for your family’s planning. Do you have enough confidence in your existing planning to get a second opinion? We operate under the fiduciary standard, always putting our client’s best interest first. Let’s get started!
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