- Escape the tax trap.
In this episode, I'm going to explain why deferring tax
in IRAs and 401ks is not smart.
Hopefully, this will help you prevent getting yourself
in a tax trap.
(upbeat music)
So I'm Doug Andrew.
I've been a financial strategist,
a tax minimization specialist,
retirement planning specialist for more than 48 years,
helping people optimize assets and minimizing taxes,
so they will not outlive their money.
And so this is huge.
A lot of times people just think, well,
I'll deal with my tax bracket when I retire.
And oft times, as I explain in my various books
and educational videos on this very channel,
that people get trapped and they go, oh my heavens,
why didn't somebody prevent this,
and now I'm gonna have to be cured from this tax disease.
Now, when you're not at ease physically, okay,
we call that disease.
When people are not at ease financially,
because they're getting clobbered with taxes
at the time in life that they thought they were going
to be in a lower tax bracket,
and if they were savers, they're sort of shocked.
They're not in a lower tax bracket.
They're in as higher, higher tax bracket
as they've ever been.
And so this is where a lot of people come
to this rude awakening and they go, how did this happen?
Every advisor told me to put money
into tax deferred IRAs and 401ks,
hence, about 91% of Americans I think are duped
into putting money into tax deferred IRAs
or 401ks, being told, and also four 50 sevens,
403Bs, pensions, profits, sharing plans.
They're all qualified plans, but they're qualified with who?
Yeah, Uncle Sam, the government,
they always have these strings attached.
You can only put in a certain dollar amount
or a certain percent of your income.
If you touch any of the money before you're age 59
and a half, there's a 10% penalty.
If you do not start withdrawing money by the age of 72,
at least required minimum distributions,
there's another penalty.
That one is 50%, yeah.
If you're supposed to pull out 50 grand and you don't,
the penalty's 25,000 on top of the tax on the 50,000.
See the government wants that money out in tax
before you die, so they can tax it again when you do die.
So, a lot of times, people don't realize that.
They just think, well, I'll deal with it when I get there.
Well, when they get there, they're shocked
because they were going down the highway, so to speak,
with one foot on the gas pedal,
and the other foot on the brake pedal, so to speak.
They were putting money
into these tax deferred accounts like IRAs or 401ks,
that's the foot on the gas,
but the other foot was on the brake,
meaning they were sort of killing their tax deductions
as they were going.
Most of us, you know, we wanna get out of debt
and pay off our house,
so you don't have that deduction anymore.
When you're retired, you are not contributing money
to IRAs of 401ks,
and so you don't have that deduction anymore.
Your children are usually gone,
or if they move back as adult children,
you cannot deduct them anymore.
If you're a business owner,
you don't have those deductions anymore.
So you have this other foot on the brake,
and then when you hit retirement,
you don't have all these deductions anymore.
And now you withdraw money.
And even if your income,
is less than what you were earning,
the last few years that you were working,
people pay as much or more in taxes.
They, they are in the same bracket
or higher than when they were working,
even if they have less income.
If they've saved very much,
they're gonna have to pay tax on a larger income
because of their required minimum distributions.
But then they get duped
into taking the minimum thinking they're saving tax
by continuing to defer.
I'll come back to that point.
And so they go through retirement,
and they are paying tax the rest of their life,
and they're going, hmm,
whose retirement was I planning anyway?
And so it's, it's like this illustration that I often use
in my educational events.
So many times people would come to me at retirement.
Now, at retirement planning is something totally different,
than maybe what you did for your retirement planning.
And a lot of people think, well,
don't I just now start taking money out
of my IRAs or 401ks, invest it in the market.
And this is where I find a lot
of Americans are way too top heavy in those accounts,
and yet to be taxed, IRAs and 401ks invested in the market.
And Wall Street was not built to create predictable income.
That's why I always go, what are you thinking here?
You're not in a lower bracket, you're a saver.
And so now we have to sort of cure that tax disease.
We have to get the taxes over
and done with sooner than later.
And sometimes people go, oh, I don't wanna pay tax.
Let's just keep deferring.
Well, defer means to put off or procrastinate.
When has procrastinating anything turned out good for you?
It hasn't for me.
And so it's a little bit painful sometimes,
when I illustrate a strategic rollout that's not a rollover.
It's a rollout.
A rollover is going from the frying pan into the fire,
so to speak, that's taking money in, in IRAs.
And actually most of the time people have money in 401ks,
and they roll it over to an IRA
because they left the company's employ,
and then they defer until they're age 72.
And then they have to start taking
out the required minimum distribution based
on their life expectancy.
And that may be, let's see, at age 72,
if your life expectancy is 20 years, let's say,
which is pretty close to what it is
for a healthy 72 year old,
you have to take out one 20th or 5%.
So if you have a million dollar nest egg,
you have to pull out 50 grand.
If you don't the, the penalty is 25,000,
but people get duped into taking
out the minimum thinking they're saving tax.
And years ago, I developed a software system,
that showed people the darkness of the night,
so to speak, if they kept deferring.
and then if they took required minimum distributions,
which I think is the worst advice for most retirees,
but it's the most common advice
'cause accountants think they're,
they're saving tax in that given year,
and that's the, the smartest advice.
No, look at the big picture,
and people are shocked when they see how much they pay
in tax, by stringing it out over their life expectancy,
their spouse's life expectancy,
and then you die and leave it behind to your children.
Now, most savvy CPAs and tax attorneys will agree,
the worst place to leave your money when you both pass away,
is in a tax deferred IRA or 401k,
and leave it to your children
'cause they cannot keep it until they retire.
They must take that money out
and pay the tax on it within 10 years.
See the government's been counting on that tax revenue.
So this is what their after tax IRAs
or 401k sort of look like.
They, they come and they go, oh,
look at this million dollars I've accumulated
into these IRAs and 401ks,
like it's this sumptuous Subway hoagie sandwich,
depicted here on the left.
But then I show them what it looks like after tax.
And it's interesting because many times,
I'll sort of tease them and say, well,
when you come to your first appointment,
this is at retirement planning,
maybe five years before they retire,
bring your after tax IRA and 401k statements with you.
Now, I know they don't have them,
but they go after tax statements.
Yeah, no, if you, if you don't have those,
I'll calculate them for you.
And basically, if they come with a million dollar nest egg,
I'll say, well, about 650,000 of that is your money.
The rest belongs to the government, okay.
If a million dollars was generating, let's say 10%,
a hundred thousand, and you pull out a hundred thousand,
you're only netting 65,000 after federal and state tax,
41 out of 50 states has a state income tax.
If it's generating 7.5%,
you pull out 75,000 out of a million,
and 25,000 goes out in tax,
and you're netting 50,000 bucks to buy gas and groceries.
That's what I mean.
It looks like this unappetizing sandwich on the right
after the government has helped themselves to several bites.
So when people would do this oft times,
they would come to me thinking,
that they would somehow deal with their money
in those IRAs or 401ks invested in the market.
And then they realized the market volatility,
the, the actual return
for retirees on people who have it
in the stock market is only 3.49%.
According to DALBAR, if you bought and held maybe 9%,
and you might net six after tax.
So a million dollar nest egg could generate 90,000 a year,
and you'd net 60,000 after tax.
But DALBAR says no, most retirees who have money
in IRAs, in 401ks, in the market,
only average, a little less than three and a half percent,
because when the market goes down, down, down,
and people will get, get panicked,
and they see their retirement nest egg dwindle down by 30%,
35%, and they say enough already.
And then they sell low, okay.
And then they wait until the market comes back,
back, back, and they get confident again,
and then they buy high.
So the average return is three and a half percent,
and that's what precipitated the 4% rule
in the financial services industry.
Because people only average three and a half percent,
they only want you to pull out four
because if you're only earning three
and a half and you pull out four,
you're gonna slowly deplete that nest egg,
but hopefully not before your LE, your life expectancy.
So you earn three and a half,
and you pull out four, you're gonna slowly deplete it.
That is called the 4% rule.
My goal for my students, and in all of my books is for you
to sort of, I'm a skier, to be able to on the last run,
instead of taking unnecessary risk and crashing and burning
on the way down the mountain,
because we are retiring,
we're going down the mountain,
and is to be able to maybe just ride in the gondola,
and be nice and warm and, and land safely in retirement.
Instead of so many people who realize, oh,
I might outlive my money.
I didn't realize taxes were gonna be this high.
Inflation is gonna kill me.
And so they go out and they take unnecessary risks
on their last trip down the mountain in retirement,
and then they lose even more money.
And so I want you to coast down in safety.
But when people would come to me
with their yet to be taxed IRAs and 401ks,
I would say, man,
were you planning your retirement or Uncle Sam's?
Because Uncle Sam is gonna get a piece of this
the rest of your lives,
if you follow your accountant's advice,
and keep deferring or postponing, procrastinating,
until you're 72 and then take out RMDs.
And when they would see this, they would go, oh, my heck.
I showed this to two school teachers, a husband and wife.
They had a quarter of a million
in their 403Bs and their TSAs when they came.
And they were shocked when I showed them that quarter
of a million, that would end up continuing to grow,
hopefully, at maybe 7.2%,
double to 500,000, by the time they were 70
and a half back then, and then generate income.
And I, I, I showed them at a minimum,
if tax rates never went up,
they were gonna pay a quarter
of a million in unnecessary tax.
I said, you know what, let,
let's just get it over and done with.
So from age 59 and a half to age 64 and a half,
we pulled out 60,000 a year.
They had to pay tax of about 12,500,
but we ended up over five years paying only about 60,000
in tax instead of 250,000.
And we repositioned the net after tax money
into the laser fund, a portfolio of laser funds.
I'll help you understand what that is in just a moment.
And they had double the income,
but it was painful for five years,
but then they absolutely loved what happened
after that five years,
because they had double the income
and it was totally tax free.
We've done this for thousands of people.
We've saved, you know, people 75,000, 1.2 million.
We've taken people from the highest tax bracket
in California to a 0% tax bracket in five years.
And so the key is, is what you do at retirement.
And so you want to choose the strategies
and the vehicles that will generate the most income
at the time in life, you're,
you're gonna be needing the money the most,
and then people get this rude awakening,
ugh, I am not in a lower bracket.
I've been saving money.
Inflation, is it going to erode away a lot
of my purchasing power?
So we help them become immune from taxes,
inflation, and market volatility,
but deferring tax in IRAs and 401ks is not smart.
I've never owned an IRA or 401k.
I never will.
And I've never owned a Roth IRA or 401k,
even though it's a step in the right direction.
If you think taxes in the future are gonna be higher,
which I do, and most people do.
Roths only have two benefits,
you contribute with after tax dollars,
you accumulate your money tax free,
and you can access it tax free.
My favorite vehicle called the laser fund does that
and has four additional benefits Roths will never have.
So you can learn more about this incredible instrument.
It's called, The LASER Fund, and what it is,
and how it works, but this is where people,
can accumulate their money tax free.
They can access the money tax free when they die
at blossoms and transfers tax free.
It's been a sacred tax free cash cow
in the Internal Revenue Code for now over 108 years.
I would recommend that 40 to 60% of your retirement income,
not even show up on the front page of your 1040 tax return.
The IRS will know you're receiving it,
but they'll know it's tax free.
You can learn more about this in the book,
and that there's only three types
of income that we pay income tax on in America
since 1986, earned income, passive income,
and portfolio income.
Money out of a laser fund is not deemed
any one of those three.
It is cut and dried tax free.
So to claim your free copy, I'll gift you the book.
Simply go to laserfund.com, laserfund.com,
or click on the link below.
You contribute a nominal amount towards the shipping
and handling.
I'll cover the rest of that cost,
and I will pay for the book.
You don't have to pay 20 bucks on Amazon for it.
Now it's 300 pages, but it's actually two books.
This white covered side is about 200 pages,
14 chapters with all the charts and graphs,
if you're a left-brain learner.
If you're more of a right-brain learner,
you flip the book over to this one, 100 pages,
12 chapters with 62 actual client stories.
If you want to learn both right brain and length,
and left brain, I would recommend you read both books.
But this is your key to a brighter future.
When you're claiming your free copy,
there's also options there,
if you like to listen and learn or watch and learn,
you can check out some of the online webinars that we do.
And also you can engage and actually talk
to a professional who knows how to structure one
of these correctly and fund it properly,
and you can pick their brain
and they will not charge you for their time.
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but this is about you and your brighter future.
(upbeat music)