As always it is a joy to serve you and work to provide relevant information that I believe will benefit your financial health, & some of your non-financial health as well here or there. In this edition of JepFin Connection I’d like to scratch a few long-delayed topics in regard to insurance & retirement plans. If you would like to learn more feel free to contact me at 866.983.7776.
Why your 401K/IRA is so very sweet (for the Government)
If I could loan you money today and ask for repayment at some point in the future with undisclosed terms, would you do it? Qualified retirement plans (401Ks, Traditional IRAs, 403Bs) work very much like that. They are potentially very sweet for the US Government as they delay taxes today on the premise that the retiree will be in a lower income tax bracket tomorrow. This is speculative to say the least. The problem is that nobody knows what the tax rates will be in the future and with record deficits accumulating currently can we really expect rates to be lower down the road? Before 1913 there was absolutely no federal income tax. The federal government was able to function without an income tax! Since that time the tax rates have varied wildly over the years.
Not only that, but if you live in a state like California you also have a state income tax to contend with as well. Am I saying abandon your 401K or traditional IRA? Not necessarily, but know the potential pitfalls of putting your money in a qualified plan. I recently met with a client that had approximately $1M in his traditional IRA plan and was not sure at age 76 if he was taking his required minimum distributions. My question to someone who has put the bulk of his or her retirement into a qualified plan is “how much of that money is really yours?” It certainly is not the entire balance on the account; Uncle Sam is going to take his cut. And how can you know when you don’t know the forth-coming tax rates? Tax qualified plans have a risk – the risk of unknown future tax rates. This could affect your retirement dramatically.
Why your Life Insurance premiums are limited (by the Government)
If you are a healthy 45 year old looking for the lowest rate on a $1M plan, you could probably pick that up fairly inexpensively. The lowest rates on coverage are set by the insurance carriers based off the underwriting for a particular applicant. But what if that 45 year old wanted to actually pay as much as possible for that $1M plan? Why would anyone on Earth do that, and who determines what that rate would be for the maximum premium? The US Government actually sets that rate. And why? Because permanent life insurance has a tax advantage they don’t want you to overuse. The reason some people (like my CPA) put the most they possibly can into a specially designed permanent life insurance plan is because they want to take full advantage of tax-free retirement dollars. Maybe it is retirement, maybe college savings, or maybe a supplement for a qualified plan, but tax-free money is good. I am not against non-cash building life insurance plans, or qualified plans, but a permanent plan can help fund against excessive taxes or underfunded retirements. The truth is that there is a tax advantage to permanent life insurance, and it is big enough that the US government has noticed!
What a market downturn could mean
This past month the stock market had the best day of 2014. The very next day it posted the worst day of 2014. The volatility of Wall Street continues to take investors for a ride. If you have recently lost money in your retirement savings, how much more of your retirement could you afford to lose? Maybe you are young and can afford to ride the rollercoaster, but if you aren’t in that position to recover from a market down-turn it could be time to consider reallocating a portion of your retirement to a more conservative vehicle. There is a way to hedge against market downturns while still receiving the upside of the market. An index annuity is one option that helps reap the upside of the market, but avoid a downturn.
Fast Financial Facts. Did you know…
- That the Federal Reserve is not federal? It is a private organization that is owned 100% by banks!
- That the US has been in debt every year of its existence except for 1, from 1835-1836.
- Over time 80% of mutual funds underperform the stock market!
- The biggest buyers of cash-value life insurance plans are banks. (2008 FDIC reported BoA had nearly $19 Billion)
Blessings on you and I look forward to next time!
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