IRAs and 401Ks are both horrible in my opinion.
In this episode, I'm going to address the question
"What is the difference between a 401K and an IRA?" Now, that was a little bit
harsh but I have this little ditty in my life,
"Good, better, best. Never let it rest." How good gets better and better get best.
Now, IRAs and 401Ks may have been a good way to go but
they have always been a far cry from the best way to go.
So, put your seatbelt on. I'm going to enlighten you on why i have never owned
an ira 401K, never will.
So, I'm Doug Andrew. I've been a financial strategist, retirement planning
specialist for more than 46 years. And I have never
advised any of my clients. We have over 10 000
clients that we've assisted. And I've written 11 books and i have never
recommended that people prepare for retirement by
putting too much money or maybe not even any
money into traditional IRAs and 401Ks. So, let
me explain to you why because when people ask, "So, what's
the difference between the 2?" Let's address that one first.
You know a 401K is usually a company-sponsored
plan. It's where the employer will allow you to put in pre-tax dollars, okay?
Maybe the employer matches 50 cents on the dollar or whatever. And so,
you may put in 4% of your income. They match another 2% or
whatever. Now, that may be okay. But a lot of people
don't realize the negative impact of taxes on the back
end. But 401Ks are generally through your employer.
They are funded with pre-tax dollars. An IRA
is usually an individual retirement account is what it stands for.
And so, you own that individually. You actually
put money in and you deduct off of your taxes
what you contributed up to whatever the government allows.
You actually deduct it off your taxes whereas 401Ks,
you're putting in pre-tax dollars. You didn't earn it and then have to deduct
it. It's not reported that you earned it and
then you had to make a deduction. It was pre-tax
and you will pay tax when you take it out. But the same is true
with a an IRA. Now, they're both qualified plants. Qualified with who?
The government, Uncle Sam. And he's your partner on those. So, let me explain
why I've never owned one and I never will. An IRA,
401K, 403B, 457 pension plan, profit sharing plans. These are all qualified
plans. Qualified in the internal revenue code to
generally be funded with pre-tax dollars or you
can tax deduct what you put in there like an IRA.
Now, we also have Roths which i'll talk about here in just a moment.
But when you have a qualified plan, there are strings attached. You can only put in
a certain dollar amount per year or a certain percent of your
income. Some advantages might be that your employer may match you.
You get to fund it with before tax dollars.
But then it accumulates tax-deferred, not tax-free. Tax-deferred. And then
you agree to pay tax when you take the money out during retirement.
And when they first were introduced, most people,
most advisors did it under the premise, "Well, you're going to be in a lower tax
bracket when you retire." So, you want to defer and it will grow to
a bigger sum of money. And then you'll pay tax in a lower
tax bracket when you retire. Well, folks, that
was the premise. But that has not been axiomatic, automatically true
for over 25 years. But it took the financial services industry to finally
admit that was the wrong advice because they're always talking about being a
fiduciary. What's a fiduciary? Someone who looks out for your best
interest. And if they admit that even though they knew you were headed for as
higher higher tax bracket as you've ever been in in retirement
because you're killing all your deductions along the way by paying off
your house and and the kids are now gone or if they're
not gone you can't deduct them anymore. And you're not contributing money to
these IRAs and 401Ks and congress keeps raising taxes and
eliminating deductions, people are in as high or higher tax
brackets when they retire. As they were in when they were earning
money. I've done these kinds of analysis for all kinds of
professional, school teachers and they've always been flabbergasted when
they found themselves paying back every dime they saved in tax
over 30 years, 35, 40 years on the contributions. The seed money is
what I call it because if you're a farmer.
And you had the choice of buying your seed in the springtime
and you didn't have to pay tax on what you paid for the
seed. And you planted, you cultivated, you irrigated and worked hard and then in
the fall, when you harvest your crops, now you
agree to pay tax. See, that's a traditional IRA or 401K. People
thought they were going to be in a lower bracket and they weren't because they
were going down the highway with one foot on the gas pedal
and the other foot on the brake pedal. And they didn't know they were doing it.
They're deferring deferring and then killing the deductions.
That's the foot on the brake by paying off their house. And I'm not saying
that's that's a bad idea. Except you're killing your deduction.
The kids are gone and if you're a business owner you don't have those
deductions and congress keeps raising taxes,
you're not contributing to these accounts after retirement, people find
themselves in this higher higher bracket and they pay back. The average school
teacher that I ever analyzed paid back every time they saved
on the seed money the contribution money over 30 years.
They paid that back the first 2 ½ half years in retirement
on the average. And every 2 ½ years thereafter they paid it back
again and again and again to where they were paying back
8 to 12 to as much as 15 times the taxes in retirement than they saved
during the contribution years. Whose retirement
were they planning? Theirs or Uncle Sam's?
So, what's better? If it's not clear, first of all, I think they're horrible
because they're taxable. And I'm not the only one back in 2008,
Stephen Gandol wrote the cover story for time magazine and it
said Why The 401K should be retired? What you
can do that's better instead? His opening sentence said something like,
"The 401k is a financial flop, a rotten repository
for our retirement reserves." Now, he was talking about because most
americans for the second time in the decade from 2000 to 2010 lost
40% on the average in their IRAs or 401Ks because the money was in the
market. And so, during that decade, people... We call
it the lost decade. They lost 40% from 2001 to 2003.
Took 4 years to make it back and another one single year 2008, they lost
40% again. It took till 2012 just to get back
to break even. People following what I recommend
tripled their money in that period where most Americans who had their money
and IRAs and 401Ks in the market. If they had a million bucks in the year
2000, they still only had barely over a million dollars
12 years later in 2012. whereas people following what i'm going to share
next, they had 3 million for their 1 million. 3 times as much money.
IRAs and 401Ks, if they're in the market, that is not where you want your
money in retirement. And you're postponing,
you're delaying, you're procrastinating paying tax. When I
ask people, "How many of you think future taxes are going to be lower?"
Nobody raises their hands. Look at the the deficit spending, the economic
stimulus, the bailouts and and people wanting student loans
forgiven and medicare for all. This is going to cost us 100 trillion dollars in
the next 10 years. You divide 100 trillion by 10.
That's 10 trillion a year. And the IRS only brings in four and a half trillion
in revenue total. Hello? Where's the money
going to come from? The general accountability office,
congressional budget office estimates taxes will go to 50, 60, 70 percent.
So, if you think taxes are going to be higher in the future, (which I do)
why do you want to continue to postpone, delay, procrastinate
and accumulate this big nest egg and then pull out your money down the road
when we're all convinced taxes are going to be higher? That doesn't make sense.
So, when we talk about IRAs and 401Ks, these are
qualified plans. I would rather put my money in a non-qualified plan. Meaning, I
don't have all these strings attached. And so, that's why my favorite vehicle is
a max-funded IUL. I-U stands for indexed
universal life insurance contract. But it's structured with the least
amount of death benefit the irs will let you get away with. And you put in the
most premium and it turns into a cash cow.
This is where I have earned 7 to 10 percent tax free.
Not tax deferred. Tax-free rates of return for
45 years. In fact, the last 25 years, I've averaged 10.07%
net after all fees, cash on cash. Most advisors don't even know how to
structure these. But this is by far my favorite vehicle. And I
want to just share a test that you need to apply to money
that you would consider putting into an IRA
or 401K. Now, if your employer matches, you don't
put in one dollar more than you're being matched. If they match you 50 cents,
I see so many people put in way more than their employer matches. I would
not do that. And by the way, match usually the employer
is simply covering your tax. If you put in a dollar, they match you 50 cents, you
got to buck 50. You pull out a $1.50 out of there,
and you got to pay the government third of that. So, your employer is
covering the future tax liability if taxes were only 33%.
So, that's okay. But don't put one red cent in my opinion
into an IRA and 401K more than what your employer is matching. If they're not
matching, I wouldn't even own one. So, let me show you what I think is
better. So, to be clear, I've never owned an ira 401K, never will
because in my opinion they're horrible because
you're not saving tax. You're actually bringing
on Uncle Sam as your partner. And as a partner he's saying, "Hey!
in this partnership, I get let's say 33%. I get a third of everything that your
business is going to grow to if you're starting a business together.
You do all the work and everything. And if you
want to sell before I'm ready, I'm going to penalize you 10%
on top of the third." See, if you touch the money out of an IRA and 401K before you're
aged 59 ½, there's a 10 penalty. But if you don't start taking
money out by age 72, it's a 50% on top of the tax because the
government wants all that out and taxed. So your partner on these, Uncle Sam is
saying, "If you don't start taking money out and
giving me my share by age 72 at the minimum amount I require,
then the penalty is 50%. But if I feel like i'm more hard up,
I can change my percentage from a third, to 40 to 50 to 60 percent.
I call the shots as far as my share." Would you go into a partnership
in a business with someone like that? Well, I just described an IRA and 401K to you.
So, my preferred vehicle is totally tax free. It doesn't have these strings
attached. I can put in a large sum of money. 2 or
3 hundred thousand dollars in a banner year.
You can't do that into an IRA or 401K or a Roth.
If I don't have a good year, I don't have to put in anything.
If I could put in 300,000 and I don't I only put in 30,000,
in future years i can make up for the 270,000
that I could have put in that I didn't. You can't do that in an IRA, 401K or a
Roth. I can use indexing and participate when
the market does well but never lose when the market goes down.
In my account, if I die, it doubles or triples (Right now, if I died at age 68)
and transfers tax free to my heirs. There's not an IRA 401K or a Roth around
that will do that. And so, I can also access money before
age 59 ½ with no IRS penalty. So, why would i own an IRA, 401K
or a Roth whether I can have all those benefits and none of the strings
attached? In January a couple of years ago, the wall street
journal said, "The original champions of the 401K,
lament the day they ever came up with that idea."
Why? Because it's not serving Americans well. They lose money in the market. You
can't create predictable income and they're not in a lower tax
bracket when they retire. So, think about it and if you want to
learn more about my favorite vehicle, let me show you how to get a copy
free of my most recent best-selling book. So, if this is intriguing you,
I'm an author. I've written 11 books. My most recent book is a bestseller, The
Laser Fund they're flying off our warehouse shelves.
It's actually 2 books in 1. There's this one and this one. This one
is 200 pages, 14 chapters with all kinds of charts and graphs. The
Laser Fund is my favorite vehicle. It stands for liquid assets safely
earning returns. That spells the acronym LASER. If you learn more from stories, you
flip the book over and this is 12 chapters about 100 pages
with 62 actual client stories and examples of
how the laser fund is used not only for retirement but
college funding, business real estate management, all kinds of
uses like emergency funds. So, I'll tell you what. If you go to
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options there if you would prefer to listen and learn
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But I want to empower you please claim your free copy.
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