Tax-qualified savings plans, like a 401 k or IRA, have become the most popular retirement vehicle for American families today. All contributions grow tax deferred, and if your company offers a 410 k plan, most companies will even match a portion of your individual contribution. Sounds great! You receive free money from your company, and you have the added benefit of tax deferred growth! Who wouldn't want to participate? Let's take a little closer look at some figures, and what this means to you and your family in retirement.
If you were to invest a mere $100 per month over a 30 year period, your total contribution would equal $36,000. If we project a 10% growth rate, when you retire, you would have $226,049 in your retirement account. That's a 528% return on your investment!
Now, if this money was invested into a tax-qualified savings account, like a 401k, you would have delayed paying taxes on your $36,000 contribution. To be conservative, let's assume that your net tax rate is 20%. This would mean that you delayed paying a total tax liability of $7,200 during those accumulation years. Not bad. Who doesn't want to save $7,200, right?
There is one minor problem. This tax burden was only delayed, not saved from taxation. Now that you are ready to retire, the government wants their fair share, and they're going to take it. To be consistent, let's assume the same net tax rate of 20% in retirement. If we apply that to your $226,049 account, now your total tax liability becomes $45,210! That means you delayed paying $7,200 to ultimately pay $45,210 to the government. And remember, these figures reflect a minimal investment of $100 per month. Imagine what this would mean if you were investing $500, $1000 or even more per month into a tax qualified plan. The problem becomes worse. Much, much worse.
This doesn't really seem very fair, but unfortunately, this is what millions of people are doing every single day when investing into tax qualified plans.
There is good news. Imagine an investment vehicle that allowed you to withdrawal your funds, completely tax free. A vehicle that only shared in the market gains, so your account was no longer susceptible to monetary loss, ever. A vehicle that you could access at any time, even prior to retirement age. You would be talking about an Indexed Universal Life Insurance product, and I am amazed how few people understand how this works.
Because these contributions are made with post-taxed dollars, the account grows on compound interest , and is accessible 100% tax free. Why? Because this is a life insurance product, and you don't pay taxes on life insurance. If properly structured, this is a phenomenal investment vehicle that works as an unparalleled tax shelter. Your cash accumulation account grows on compound interest, you can borrow it back at any time, and you don't pay any taxes on your withdrawals.
With current market conditions, account restrictions, and future tax liabilities, why would anyone invest in a tradition tax qualified plan? Great question.