You will likely pay 8 to 12 times the taxes on your 401(k)
than you saved in tax. In this episode, I'm going to address the question, "Do you pay taxes on
401(k) withdrawals after retirement?" Hello? Yes. But you wouldn't believe how many people actually
don't realize that. They get hired at work, they follow the herd, they put money in the companies
401(k), 403 (b)s for school teachers and so forth. They're all the same 457s for government workers.
And they think they're going to be in a lower tax bracket when they retire.
Well folks, get ready. You're going to see that is not the best way to save and
you need to get the money out and the tax is over and done with sooner than later.
So, my name's Doug Andrew and I've helped people optimize their financial assets for more than 45
years and minimize unnecessary tax. Now, in doing that, I have found that many many people are
shocked when they retire because they've never thought about the taxes they're going to pay
or if they thought, "Well, I do have to pay tax but I'll be in a lower bracket then, right?" No.
Most people if they have a respectable retirement nest egg have accumulated enough money to equal
or exceed the income they were earning. Now, there are some people who will not be in lower brackets
because they're not savers. But if you save 10, 15, 20 percent of your income and you do that for
30, 35, 40 years, you will likely have a nest egg that will generate as much or more income than you
were earning. If you want to retire sooner than later, then you need to set aside more like 25
to 30 percent of your income. So, I'm talking to an audience here that saves money. And so,
if you've saved a lot of money in yet-to-be-taxed IRAs of 401(k)s. Maybe you did not realize that
you've had a partner all along. Now, let me just frame it this way. "Let's say that you and I were
going to go into business together and we're going to form a partnership. And here's the deal. I'm
your partner and you do all the work. And as you continue throughout your lifetime to build up this
business, the deal is this: At the end of the day when you go to sell or liquidate this business,
I get a third of everything you sell the business for. And if you sell the business or dip into it
sooner than age 59 and a half, I not only get a third but I get another 10 on top of that. I get
43% or more if you touch it early. Now, if you do not sell your business by age 72. I'm going
to come in and take 50 as a penalty on everything that you should have been giving me from the sell
of the business." Now, already, you're going, "Who would ever go into a partnership like that?"
But I'm not through, okay? "If I deem anywhere down the road that I am more hard up than you
I need the money more than you do, I can change my percent in this partnership from 33 up to 40, 50,
60 percent. Even 70%. But that's my choice. Are you ready to go into business?" People go, "What?
That would be the stupidest arrangement ever?" I just described an IRA or a 401(k) to you. Because
whether you knew it or not, your partner is Uncle Sam. And he has quite the appetite and he has
rules and you're going to understand these rules better as you continue to watch this episode. But
you want to free yourself from that partnership because Uncle Sam and 41 out of 50 states,
the governor also has a permanent tax lien on your 401(k)s and IRAs. And so,
I think the problem is the original premise was incorrect. I think a lot of Americans are
duped to put pre-tax dollars into a 401(k) or tax-deductible contributions into an IRA
being told they'll likely be in a lower tax bracket when they retire. And frankly, this is
why clear back in the 1980s and '90s, i wrote an article that got published all over the
nation How Congress is Peddling IRA and 401(k) Snake Oil, okay? And then in the early 2000's,
we had time magazine in 2008 come out with a front cover story Why It's Time to Retire
The 401(k) And Do Something Better Instead. Now, it's because most Americans lost 40% in the value
of their IRAs and 401(k)s if they were invested in the market for the second time in a decade.
But the biggest reason that I always said is because people aren't in lower brackets. In fact,
in 2017, the wall street journal came out and said, "The original champions
of the 401(k) lament the day they ever came up with that idea". One of the reasons is
because most retirees that accumulate very much money (the savers) are not in lower brackets.
So, the premise is incorrect. Most people that I have met, school teachers,
they pay back every dime they saved in taxes over 30, 35, 40 years on the contribution phase.
They pay back every 2 or 3 years the rest of their life to where they end up paying 8 to 12
times the taxes back in retirement during the distribution phase than the taxes they saved
on the contribution phase. There are 4 phases of retirement planning. The contribution phase,
the accumulation phase, the distribution phase and the transfer phase. Now, the contribution is
the money we put into plans like IRAs or 401(k)s into savings. It overlaps the accumulation phase
but then the distribution phase is when you take withdrawals out of your accounts. Now, sadly, too
many people go into withdrawal. When they hit this phase because they start paying taxes more than
they ever thought they would pay in retirement. They were always told they were going to be in a
lower tax bracket. When we usually die, we leave behind something that would have sustained us had
we lived longer. Often, people don't think about the tax ramifications in these 4 phases. There are
5 basic savings alternatives, okay? The first would be taxed as earned investments. A bank,
cd accounts, regular mutual funds. You fund those with after-tax dollars. You pay tax on
your earnings. You take the after-tax dollars and you put it into a taxed as earned investment where
every year you pay taxes as you're earning the money. You get a 1099 statement on the interest
that you've been earning or the dividends. Also, any gains are taxed and when you die,
you leave behind the money and it's taxed (possibly) when you transfer it. So, it's tax,
tax, tax, tax. It's the worst way to save but the most common way Americans save money, okay?
Next, you would uh put money into simply a non-qualified tax-deferred investment.
This is where it's not an ira or 401(k). You're taking after-tax money and you're putting it into
a tax-deferred vehicle like an annuity. Now, an annuity is a savings account with an insurance
company. When you put money in, you fund it with after-tax dollars, it accumulates tax-deferred.
But when you take out the money is now taxable and it's taxed lifo. That means last in first out. If
you had a half a million that you put in there and if it was earning 10% that's 50,000 a year.
If you started taking 50,000 a year right off the bat, that 50,000 is the last money you're earning.
The interest is the last money you're earning is the first money out. That is taxed when you take
it out and it's taxed when you die. You only have one green circle. Now, the most common way people
save is in tax-deferred IRAs and 401(k)s. But I usually ask the question. If you were a farmer
and had the choice to pay tax on the seed, okay? When you bought your seed in the springtime,
you could pay tax on the seed or you could buy the seed without tax. And then you plant,
you cultivate, you irrigate, you work hard. And in the fall, you harvest your crop. Now,
I'm talking about retirement. The seed money in IRAs or 401(k)s, your contributions versus
the harvest money during the distribution phase. If you were a farmer, would you like to get a tax
break on the seed when you bought it and then have to pay tax when you sell your harvest in the fall?
Most Americans go, "No." I think I would rather enjoy the harvest without tax. Yet, 91
of Americans choose to get a tax break on the seed money and then pay tax on the harvest
because they thought they were going to be in a lower tax bracket. And that has not been true
or axiomatic for more than 25 years. And so, when we put money into a tax-deferred IRA or 401(k),
we get a tax break on the contribution phase, it accumulates tax-deferred. But when we go to
withdraw the harvest during the distribution phase, now we pay tax the rest of our lives if
we string it out. And when we leave it behind to our children, they have to pay tax on it too
within 10 years if they inherit an IRA or 401(k). So, you only get 2 green circles on the front end,
2 red circles on the back end. So, what's my favorite vehicle? Now, people may say, "What
about a Roth?" Well, a roth is a step in the right direction because back in 1997 when congress was
hard up for money, tax revenue, senator Roth said, "I have an idea". A lot of people are getting
smart. They realize it'd be better to pay tax on the seed money and enjoy the harvest without tax.
But see, I've never owned an IRA or 401(k) or a Roth and I never will. My favorite vehicle is a
MFTA, max-funded tax advantage section 101(a). That's a section in the internal revenue code
and I call it an alternative. It's what I call the Laser Fund. And I'll show you how you can learn
about this at the end of this episode. But I fund it with after-tax dollars. I pay tax on the seed
money. It accumulates tax-free. I can access the money anytime I want tax-free. A Roth, you can't.
You have to wait until you're 59 and a half or 5 years. I can access my money tax-free including
all the gain forever. And when I ultimately die, it blossoms in value and transfers income
tax-free. I'm 68 right now. If I died tomorrow in an accident, every million I would have in my MFTA
alternative would blossom to about 2 and a half million and transfer income tax-free to my wife,
to my children, to my church, my charity. There's not a Roth around that will do that.
I have the 2 benefits of a Roth. I accumulate my money tax-deferred, I can take it out tax-free.
But for additional benefits with a Laser Fund the Roths will never have. I also teach in my
various books how I like 4 green circles. But the message here is 3 green circles
is far better than 2 green circles with IRAs and 401(k)s. I can prove to you this will
give you off times 50 to 100 percent more in net spendable income. Especially if you think future
tax rates are going to be higher which most people think they will be in the future. I like 4 green
circles. You would have to read one of my books to understand how to get tax breaks on the front end.
Use 100% tax-advantage dollars on the seed money but not at the expense of giving up
paying tax on the back end. 4 green circles is better than 3. But 3 are better than 2.
So, how does all this come together? Again, in answering this question,
"Do you pay taxes on a 401(k) when you take withdrawals?" Absolutely. But a lot of people
think they're saving tax by continuing to delay or postpone or procrastinate. And so, they get
uh caught in this tax trap and they put it off and if they don't need the money, they're convinced by
their accountant. "Oh, I can save you tax this year if you don't take money out." Well, they
should be asking, "Would you like to compound your tax and postpone it to the future?" -"What did you
say? Compound it?" Yeah. Increase it. Because that's what you're doing if you wait until your
age 72 (is the age now) where you must start withdrawing money or you're going to incur a 50%
penalty. If you're supposed to pull out 50,000 and you don't the penalty is 25,000 plus you pay
tax on the full 50,000. I've seen people pay as much as 80-90 percent in taxes and penalties on
money they should have pulled out. So, most people go, "Well, what's the minimum?" That's the wrong
question. What's the maximum you can pull out? You want to do a strategic rollout which is a 3-part
strategy. You want to get the money out the taxes over and done within today's current tax rates
rather than thinking tomorrow's tax rates are going to be lower. Most people don't believe
future tax rates are going to be lower. What you do with the after-tax money coming out of
401(k)s is put it into something that's going to be tax-free from now on. My favorite repository is
what I call the laser fund because it is totally tax-free. But I also like it because when I
ultimately die, it blossoms in value and transfers income-tax-free thereby reimbursing me many fold
or my wife and my children far more than what I paid in tax. So, they're actually coming out ahead
than if I had left my money in IRAs and 401(k)s and strung out the taxes for the rest of my life
and their lifetimes. The third part of a strategic rollout is if we can, we like to offset the tax
by creating new deductions. And many times I've been able to offset all of the tax by resurrecting
deductions that most people were killing by paying off their properties. So, you want to investigate
this 3-part strategy. Read about it, study about it. And I'm going to share with you an example
of a 5-year rollout next. So, in this episode, I've been talking about these stories and examples
are explained in my most recent bestselling book The Laser Fund. This isn't about selling you a
book. I'll gift you a copy of this. I'll show you how you can claim your free copy here in just a
moment. But in this book, there are 14 chapters in this left-brain side with all kinds of charts and
graphs. If you learn more from stories which I'm going to tell you next, you flip it over. And this
has 12 chapters with 62 actual client stories of how the laser fund is used not only for retirement
but working capital for business, college funding for children, for emergency funds and so forth.
I'm going to share a story that's in the book. And this is a gentleman that came to us when he was
70 years old. And he had $600,000 in yet-to-be-taxed 401(k)s that he had rolled
over into IRAs. And his advisor told him... You know what? We know that for the previous decade
2000 to 2010, he basically hadn't earned anything. He had 600,000 at the beginning of the decade. It
dropped to less than $300,000 twice and barely came back to 600,000. But his advisor said,
"Hang in there. The market always comes back." But his advisor told him to take out only 4%
a year to make sure that he didn't have to get penalized 50%. Because at his age 70 and a half,
if he didn't withdraw what the government says you're supposed to, (RMD's --required
minimum distributions) there would be a 50% penalty. Well, his advisor said, "Take out 4%".
4% on 600,000 was 24,000 a year. He had to pay tax on that of a third. That's 8,000.
He was netting 16,000 to buy gas and groceries on a 600,000-dollar account. That is pathetic.
When he came to us, I said, "Sir, we need to get the money out and the tax is over and done with
sooner than later with a strategic rollout." Long story short, we did that over 5 years.
We took out 150 grand a year. Over 5 years, we pulled out 150,000 times 5. That's 750,000.
People say, "Well, wait a minute. He started with 600." Yeah, he earned an extra 150,000 with us
while we were getting it out because we continued to earn money for him. He pulled out 150,000. Now,
worst-case scenario: He pulls out 150,000, pays a third in tax, he nets 100,000 to put into my
favorite vehicle the laser fund which is tax-free. At the end of 5 years, he's pulled out 750,000,
paid a third in taxes, and he has another 500,000 in the laser fund. He's been earning
between 8 to 10 percent on his laser fund. What's 8 percent on 500,000? 40 grand a year tax-free.
How much better is 40,000 a year of tax-free income than 24,000 that only nets him 16,000?
Because we were able to get out at least 500,000 after tax, 10% would be 50,000. But when you read
the rest of the story, we offset the tax on his 150,000 of annual withdrawals out of his 401(k),
IRA accounts by resurrecting new deductions that he'd been killing by paying off his rental
properties. This is another concept on how to become your own banker. Long story short,
we got his 750,000 out over 5 years with no tax consequence. So, in reality, 8% on 750,000 is 60
grand a year. When he earns 10%, that's 75,000 a year of tax-free income. Versus the 16,000 a year
after tax in his IRAs and 401(k)s under RMDs. Do you think he's happy that he learned about
this strategy? If you want to learn how this may apply in your particular set of circumstances,
claim your free copy of this book. You do this by going to laserfund.com. LASERfund.com. You pay a
nominal amount towards the shipping and handling. I'll pay for the rest of that. I'll pay for the
book and fire it out to you. There's also options in there to get the audio version. Or you can
watch and learn. And subscribe to this channel. I post an answer to a question almost daily on
a specific financial topic that will empower you to optimize your assets and minimize taxes.