Free yourself from the tax trap sooner than later—now’s the time to convert IRAs and 401(k)s to better strategies.
Many times people have come to me in their 60s or 70s, realizing that now they’re AT retirement, they want something totally different than what they did FOR retirement.
As we take a look, we can see they are way too top-heavy in traditional IRAs or 401(k)s, which has left them exposed to market volatility and significant taxes.
WALL STREET IS NOT ABOUT PREDICTABLE INCOME
I often ask, “What are you thinking?” And they say, “What’s wrong?” I have to break it to them: “Wall Street was not built to create predictable income streams.”
If you ask Wall Street, “When is the best time to sell your stocks, bonds, and mutual fund shares?” They will say, “Never.”
If you ask a Wall Street asset manager to create illustrations of predictable cash or income, they will be very hard-pressed to do it. And even if they do, they’re usually restricted to a 4% illustration.
They do not want you to pull out any more than 4% a year out of your IRAs and 401(k)s invested in the market. Why? Because DALBAR, which has studied investor behavior, says that the average retiree in America is only earning 3.49%.
How would this play out? Let’s say you have $1 million dollars saved in your 401(k). If you were to pull out 4%, that’s only $40,000 a year. That’s not a lot to live on, especially when you’re going to be taxed on that $40,000—which means you’ll have even less.
Now if you’re only earning $35,000 (at the average 3.49% estimated by DALBAR), you’re going to slowly deplete that nest egg. Imagine if you were to take out more than 4% a year; you’d deplete the nest egg even faster!
This is why they typically restrict you to the 4% Rule. If you pull out more than 4%, you often have to sign a waiver that you will not sue them for helping you outlive your money.
I wouldn’t want to limit myself in retirement like that, because my favorite vehicle, which I call The LASER Fund, generates usually between 5% to 10% a year, and has done so for over 40 years.
If we take that same million-dollar nest egg and watch it grow at let’s say 8%, you could be accessing up to $80,000 a year of tax-free income for as long as you live—even if you keep going until age 120—without depleting your principal.
Now how much more is $80,000 than $40,000? Not just $40,000. It’s 100% more. It’s double the income, and it’s tax-free. Compare that to $40,000 coming out of a yet-to-be taxed 401(k). Even in a 25% bracket, that would only net you 3% or $30,000.
When you factor in the 1% asset management fee that many of these asset managers charge, you’re down another $10,000. So when you subtract taxes and fees, your $40,000 is only netting you 2%, or $20,000. Would you rather live on $80,000, which is four times $20,000?
PAY NOW – OR PAY MORE LATER
There was a TV commercial some of the older folks might remember, where an automobile mechanic would hold up an oil filter and say, “You can either pay me now to change your oil filter, or you can wait and pay me later to replace your engine.”
Now, when we relate that to people’s retirement savings like IRAs and 401(k)s, the same thing applies. You can either pay the taxes now, which are likely to be far less because your current tax bracket is likely the lowest bracket you’ll be in moving forward. Or you can pay the taxes later, when you’re likely to be in a tax bracket that’s as high or higher than you’re in now.
If you choose to likely save money by getting the taxes over with now, you can reposition your net after-tax dollars into something that’s going to be tax-free from now on.
You might be thinking of repositioning your money into a Roth, which would be a step in the right direction, but I’ve never owned a Roth and never will because my favorite vehicle knocks the socks off of Roths.
You cannot believe how many people sit tight and hang onto their IRA or 401(k)s until they’re age 59 ½. when they can access their money without a 10% penalty. Then they continue to keep their money there until they’re age 72, when they have to take out RMDs, or required minimum distributions.
They’re just following traditional advice, but it’s the worst advice for most retirees. They’re told they’re saving money on taxes, but they’re actually compounding the problem, increasing their taxes.
I developed software years ago that showed my clients the darkness of the night if they continued to keep their money in tax-deferred IRAs or 401(k)s, planning to take out RMDs the rest of their lives, while ending up paying more taxes than they could have imagined.
When they saw what would happen if instead they pulled their money out, got the taxes over and done with, and repositioned their money in a superior financial vehicle, they were amazed. They could see it made sense to change their strategies sooner than later, essentially replacing the “retirement filter” now versus waiting to replace the “retirement engine” later.
But what happens if you, like many of my clients, wait until age 70 or 72? I’ve had to help clients practically replace their entire retirement engine, while they were kicking themselves. They’d say, “Where were you 30 years ago?”
Well, I’ve been beating this drum for decades. But folks are often committed to following the herd, putting money in traditional IRAs or 401(k)s, thinking they are going to be in a lower tax bracket when they retire.
I can reassure you that this has not been true or axiomatic for more than 30 years. Most people who accumulate a respectable retirement nest egg are not in lower brackets when they retire, because they’ve lost their deductions along the way. The only people who tend to be in lower brackets are those who didn’t save very much money.
So what should you be doing? A strategic rollout—which is not the same as the more familiar strategic rollover. Traditional rollovers from your pre-tax IRA or 401(k) to something like a Roth is actually like going from the frying pan into the fire as far as I’m concerned.
Even if you’re under age 59 ½, but for sure if you’re over age 59 ½, consider a strategic rollout. I’ve designed strategic rollouts where clients were able to get their money rolled out in about five years, get the taxes over and done with, and reposition their after-tax money into a vehicle that was tax-free.
My favorite vehicle for a strategic rollout is The LASER Fund. With properly structured, maximum-premium LASER Funds, your money grows tax-free; you can access your money tax-free, and when you ultimately pass away, your money transfers income tax-free to your heirs.
Many times we have been able to help clients double and even quadruple their net spendable income during retirement with strategic rollouts.
To share clients’ rollout experiences, I think first of a real estate landlord guru we worked with. We saved him $750,000 by getting his money out of those IRAs and 401(k)s and into a portfolio of LASER Funds.
We also helped a California couple move from the highest tax bracket in five years to a 0% tax bracket.
Another couple we worked with were both physicians with over $4 million set aside for retirement in traditional accounts. If they had followed their advisor’s advice, maintaining their IRAs and 401(k)s, eventually taking RMDs, they were going to pay $2.6 million in tax. We couldn’t save them that entire $2.6 million, it was too late, but we could save them $1.2 million.
They decided to perform the rollouts and were able to redirect that $1.2 million of otherwise payable tax to what we call their Family Bank, which is now funding college tuition, military service, religious missions, and humanitarian missions for their kids and grandkids into perpetuity.
You can read more about these stories and explore how strategic rollouts work in my book, “The LASER Fund.” It will be worth your while to read up sooner than later, because now is the time to convert your IRAs and 401(k)s.
WANT TO LEARN MORE?
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