Ed Slott is a CPA who specializes in educating people on the tax implications of their IRA’s and other qualified accounts like 401k, 403b, TSP, etc. He has written several books including Stay Rich for Life and has appeared on public television with his ‘Stay Rich for Life’ program. Here’s a summary to which I whole-heartedly subscribe.
Taxes will increase dramatically in the coming years due to our fiscal crisis.
You need to anticipate this and move your money from accounts that are forever taxed to accounts that are never taxed, keeping more of your money for you and your loved ones. No matter how volatile or out of control the financial markets may be, there are some things you can control:
- You can control your financial security.
- You can control your tax liability.
- You can control how much you pay to Uncle Sam in taxes and when you pay those taxes – but only if you have a plan – your plan, not the government’s plan – on your schedule and timetable, not the government’s.
It’s up to you to take action. You either make a plan or get a plan.
You are going to get a plan, the only questions is: Will it be done by you . . . or to you?
The recent financial crisis makes this more critical and more urgent than ever before. It’s about the taxes. Remember, it’s what you keep that counts at the end of the game – after TAXES. This is especially true when it comes to your retirement savings. Your money has not yet been taxed if it’s in a government qualified plan (401k, 403b, 457, IRA’s, etc.).
Taxes are the single biggest obstacle to building and keeping your money.
I am not anti tax or anti government. I realize the need for taxes to run our great country and continue our way of life. Yet, I’m in the Arthur Godfrey camp on this. He said: ‘I’m proud to pay taxes in the United States; the only thing is I could be just as proud for half the money.’
I don’t believe in paying MORE in taxes than you should.
The market goes up and down and there is not all that much we can do about it. But when the market goes back up, you often can recuperate and get your money back. But, if you lose your money to the government through paying unnecessary taxes, you’ll NEVER get it back.
The reality is that Taxes have to go up.
And doing nothing is not an option, unless you want the government plan and on their terms, not yours. It’s especially true with qualified plans (401k, 403b, 457, IRA’s, etc.) where most retirement savings will end up.
When your IRA is born it came with an EVIL TWIN, Uncle Sam (your partner).
As your IRA grows bigger so does Uncle Sam’s share until Uncle Sam gets more than you. That’s when Uncle Sam becomes the SENIOR partner on your retirement savings. That means he gets more of your money than you!
Here is an example (EWS version):
Imagine your $500,000 IRA growing to $1million in the next 15 years. At today’s tax rates, about 20% to 30% (or less depending on your deductions) belongs to your partner, the government. That’s about $200-300,000. How would you feel in 15 years if $500-600,000 of your $1million belonged to your government partner? It could very easily happen. After all, they get to decide how much they will need to support their infrastructure. Tax brackets shift all the time.
You may have very few deductions left to offset these taxes. Probably no mortgage, or very little. No kiddo tax deductions living at home anymore.
That’s what I mean, when I say that the government could be a SENIOR partner on your savings. They get more than you . . . more of your own hard earned money.
It’s pretty hard to plan for retirement if you don’t know how much money you will have.
Another perspective would be to compare it to your home mortgage. If you have a mortgage, you know exactly how much it is. You may even know when you’ll own your home free and clear. So consider you have an IRA worth $500,000. It also has a mortgage.
The problem is: you don’t know the size of that mortgage.
Your IRA mortgage will be determined by the government based on how much they need at just the time you are the most vulnerable – when you need the money the most, either at retirement or even when the funds pass to your loved ones.
Uncle Sam has a clear advantage.
This is based on the government’s timetable, not yours.
Change it so that it’s your plan on your timetable. How?
Buy out Uncle Sam on your terms and at the lowest possible price, when taxes are on sale.
In an environment of increasing taxes, you want to keep moving your money from accounts that are FOREVER taxed to accounts that are NEVER taxed. There are two ways to move your money from accounts that are FOREVER taxed to accounts that are NEVER taxed.
Create NEVER taxed accounts two ways: Roth IRAs and Life Insurance.
These accounts can be used to protect your money from future tax increases. The funds that come out of Roth IRAs and life insurance are income tax-free if you plan correctly.
Remember, Ed Slott doesn’t sell life insurance, annuities, stocks, bonds, or mutual funds.
He is a tax advisor who is UNBIASED. It is very unusual to find a CPA who believes in helping people find ways to avoid future taxes, not just current taxes.
#1. Roth IRAs
There are no longer income restrictions on converting IRAs to Roth IRAs. Yes, you have to pay taxes now to do this. This is something that goes against the grain of everything you have ever been told – especially by your accountant. Slott is a CPA and he is telling people pay taxes before you have to. Yet most accountants are trained to tell you to put off paying taxes as long as you can.
Tax Postponement thinking has to change now – because tax rates will be rising and it will cost you more later.
If you run this by your accountant and he tells you that you should not pay any taxes now (because you can pay them later), here is what Slott says:
· By not paying the tax now, the problem doesn’t go away. It just comes back later, and it will be worse. The tax on your IRA is like a cancer on the account. It doesn’t go away; it just gets bigger and worse, until it eventually consumes your retirement savings, just when you need it the most.
This is how you end up with the government plan on their terms, not yours. You need to buy off Uncle Sam on your terms and at a time and amount that you chose. Roth IRAs are one of the greatest accounts ever created. You pay tax up front but the account grows tax-free forever (even when left to your heirs). Uncle Sam never gets another dime. All the gains are yours.
Better to pay the tax on the seed and the crop grows for free.
It’s not all or nothing. You can convert a portion of your IRA to a Roth IRA and do several conversions over several years. You have complete flexibility in how often and how much you convert each year.
Will they discontinue this great account?
Maybe. Nothing is guaranteed when a government’s back is against the wall. When changes like this have happened in the past, people were grandfathered in. Get in while it is available. Also, in order to access our entire Roth IRA tax free, you need to have owned it for 5 years and be over age 59 ½.
Yet, Roth IRAs are especially powerful for young savers.
They have the best asset of all – TIME. It is important to start teaching young people about tax-free saving. The first money saved by children in their first years of employment is liquid bank savings then a Roth IRA. Due to their lower income, it will be easy for them to qualify. And, because of a lower income will be in the lowest tax bracket of their lives.
Unlike a 401k, the money is not tied up for 35+ years (until 59 1/2).
Roth IRA contributions can be withdrawn any time for any reason; tax and penalty free, so young people will always have access to their money.
What causes financial insecurity? Uncertainty.
The Roth IRA removes the uncertainty of what future tax rates will be. You can’t beat a zero percent tax rate. Now is the time to buy out your partner Uncle Sam, at the lowest amount. Once you buy out Uncle Sam, all future growth in the Roth IRA will be tax-free forever.
#2. Cash Value Life Insurance
Cash Value Life Insurance is the single biggest benefit in the tax code because the money comes out income tax-free and there is no limit on this tax break.
It’s not how much you make, it’s how much you keep.
Life insurance is the best way to leverage money. By leverage, I mean turning relatively small amounts of taxable money to provide large sums of tax-free money, simply using the tax code.
Remember, Slott doesn’t sell insurance. So this is unbiased advice.
As a tax advisor he believes the single best way to leverage the tax code in order to build real wealth, real money that is FREE and CLEAR of taxes, is through life insurance.
Why does the government allow such a huge tax break?
1. One reason is because our government knows that most people won’t use the tax exemption. Sadly, our government knows that most people are shortsighted and focus only on the upfront cost of the cash value life insurance and not on the big long-term tax-free benefit, so they continue to allow the tax exemption knowing most people won’t take advantage of it anyway.
2. A second reason is a social reason. Why do you think our government encourages us to give money to charity? If you give to charity, you get a tax deduction. This removes the burden from them. It’s the same with life insurance. Our government wants us to take care of our families so they don’t have to. They want us to take care of our families with our own money and private insurance company money, so that the government does not have to.
How does cash value life insurance give your more?
Most people think they will pay in, drop dead, and get nothing. Often it’s because of self-imposed restrictions on your money. Maybe you can’t enjoy your money because you’re busy saving and sacrificing for your children. Life insurance removes self-imposed restrictions on your own money.
Once the life insurance is in place, you can spend and enjoy ALL the rest of your money, even money from the life insurance. And if your cash value life insurance was set up properly, money from your life insurance policy can come out tax free. Plus, you no longer have to worry about saving it to provide for your loved ones. They are taken care of with tax-free life insurance.
You earned it and now you can enjoy every last cent and you no longer have to sacrifice.
That’s how you get more.
So let’s recap.
Create NEVER taxed accounts two ways: Roth IRAs and Life Insurance.
As your IRA gets bigger, so does Uncle Sam’s share. Your mission is to eliminate Uncle Sam as a partner in your retirement savings. Buy him out. Buy while taxes are on sale. Taxes are on sale right now.
Move from FOREVER taxed to NEVER Taxed.
You pay up front for good things. You pay later, and much more, for bad things. Managing future taxes will be the key element in building financial security; not investment returns. Your investments won’t matter as much if you don’t get to keep your money. The only REAL money is when it’s tax-free forever.
Two ways to move your money from FOREVER taxed to NEVER taxed: Roth conversions and Life Insurance.
If you found this intriguing and want to learn more, great. Let’s set a time to talk.