IRAs AND 401(k)s DROPPING IN VALUE? CONSIDER A STRATEGIC ROLLOUT
With the worldwide COVID-19 pandemic shutting down entire nations and stock markets plummeting, if you’re feeling alarmed about the future of your own retirement strategies, you’re not alone.
We’ve had a huge increase in calls to our office, with folks worrying about the money in their traditional retirement accounts disappearing.
I would argue, there is hope.
As one of my fellow Genius Network members, Richard Rossi, has said: “When there is anxiety, there is opportunity!” You can seize this moment to get into action and create opportunity rather than worry.
During the Great Recession, millions of Americans lost 40% of the value of their IRAs and 401(k)s twice (by 2003 and in 2008). In that same period, many of my clients tripled their money—tax free. How? They owned a strategic vehicle I call The LASER Fund, and they followed the indexing strategies we teach.
Using indexing, my clients didn’t lose anything due to market volatility when the market went down. They may have not made anything in those down years, but they didn’t lose (which, by the way, are Warren Buffet’s two rules of investing: 1) Don’t lose money; and 2) Don’t forget rule #1.)
If you’d rather find yourself in a situation where you’re no longer at risk of losing the value of your retirement vehicle during economic downturns, you may want to consider getting your taxes over with, performing a strategic rollout, and moving your money from traditional accounts to a LASER Fund.
Notice I didn’t say strategic rollover—rather I said strategic rollout.
Most people are familiar with a strategic rollover, such as rolling the money from an old 401(k) to an IRA. Instead this is a rollout, where you withdraw the money from your traditional 401(k) or IRA, pay taxes and any applicable penalties, and move the now-after-tax money into a LASER Fund.
You might be wondering, why not just roll out the money into a Roth IRA, rather than a LASER Fund? Let’s explore that by comparing the Roth to a LASER Fund.
With a Roth, you enjoy these two key advantages:
- Your money accumulates tax-free
- You can withdraw your money income tax-free
That’s great. But there are government strings attached with Roths, starting with your contributions. People with higher incomes are limited on how much they can contribute, and after a certain threshold, you can’t even own a Roth.
You’re also limited on when you can withdraw money (there are penalties and taxes before age 59 ½), and Required Minimum Withdrawals kick in during your early 70s.
Another huge disadvantage? Your money is at risk if your Roth is invested in the market. When the markets dive again (and they will), your account will likely dive in value.
The LASER Fund has the same two advantages as a Roth, but without the strings attached—which is why savvy CPAs and tax attorneys often refer to the LASER Fund as “the Rich Man’s Roth” (but you don’t have to be rich to own one).
With The LASER Fund, you contribute after-tax money, and you enjoy these key advantages:
- Your money accumulates tax-free (just like a Roth)
- You can access your money income tax-free (just like a Roth)
- Your contributions are flexible, meaning you can deposit up to a maximum amount or a minimum amount, then later you can deposit larger sums to make up for years that you didn’t put in the maximum allowed
- If you need to access money for any reason, you can—there are no strings attached or IRS penalties if you do (even before age 59 ½)
- Your money is protected from market losses—you won’t lose a dime of principal due to market volatility when the markets take a dive
- When you ultimately die, the account increases in value and transfers totally income tax-free to your heirs
Let me share an example on that last point—if I died right now with $1 million in my LASER Fund, it would blossom to about $2.5 million and transfer as an income tax-free death benefit to my heirs.
So why would I ever choose a Roth, when I can have all the benefits of a Roth and a whole bunch more, without all the strings attached and the market risk?
One note—there are IRS rules that limit how much you can contribute to a LASER Fund in a single year. If your LASER Fund cannot accommodate all of what you want to roll out of an IRA or 401(k) in a single year, you may want to consider a combination move.
You could start with a rollover from your traditional accounts to a Roth to get the taxes over with. Then the monies in the Roth can be later transferred to a LASER Fund in compliance with IRS rules, essentially grandfathering your account to be tax-free.
DO NOTHING … OR DO SOMETHING POWERFUL
So as you look at the current economic meltdown, consider this. You can do nothing, keep your money right where it is in your traditional IRAs and 401(k) in the market, and ride out the losses and hoped-for future gains. Or you can get in motion now and perform a strategic rollout to a LASER Fund.
Here’s an example of what those two scenarios might look like, assuming a significant future tax increase (which is likely with rampant government spending, COVID-19 recovery measures, and possible acceptance of popular policies like student loan forgiveness and Medicare for All).
This example looks at an age 60+ holder of tax-deferred IRA or 401(k) funds:
|IF YOU KEEP YOUR MONEY IN YOUR IRA/401(K)||ACCOUNT VALUE|
|Account value before the market crash (mid-February 2020)||$900,000|
|Account value after the market crash (mid-March 2020)||$600,000|
|Account value after the market rebounds 50%||$900,000|
|Future tax liability (assuming a future combined tax rate of 50%, a likely increase due to government bailouts, spending, proposed initiatives like Medicare For All, student loan forgiveness, etc.)||$450,000|
|Net after-tax value of account||$450,000|
|IF YOU PERFORM A STRATEGIC ROLLOUT TO A LASER FUND||ACCOUNT VALUE|
|IRA/401(k) account value before the market crash (mid-February 2020)||$900,000|
|IRA/401(k) account value after the market crash (mid-March 2020)||$600,000|
|Taxes paid on strategic rollout (assuming you’re in a current 33% combined federal and state tax rate)||$200,000|
|Net after-tax amount deposited into LASER Fund strategy with your strategic rollout||$400,000|
|Account value after the market rebounds 50%||$600,000|
|Future tax liability (assuming a future combined tax rate of 50%, a likely increase due to government bailouts, spending, proposed initiatives like Medicare For All, student loan forgiveness, etc.)||$0|
|Net after-tax value of account||$600,000|
Of course, this is a simplified example. There are other factors that would play into considering if this would be a smart choice for you. Taking out a large sum could increase your tax bracket rate. However, there is often a lot of “room” to pull money out of an IRA/401(K) in each bracket.
Sometimes it’s well worth it, because there might only be a differential of 2% between a 22% and a 24% bracket, which would allow a couple filing a joint tax return to pull out an additional $155,000 in a bracket that is still likely to be the lowest bracket they will ever be in.
5 THINGS YOU CAN DO FOR A BRIGHTER FINANCIAL FUTURE
To summarize, with taxes likely going up and your likelihood of being in a tax bracket that’s the same or higher than your current bracket, it can be advantageous to get your money out of your IRAs and 401(k)s now, get your taxes over with, and get on a better path toward a brighter financial future with a strategic rollout.
- It may behoove you to roll out some (or all) of your tax-deferred IRAs or 401(K)s now while the account values are lower, and tax rates are lower than they will likely ever be.
- It’s critical to then reposition the after-tax rollout monies into tax-free growth vehicles.
- Consider repositioning some or all of your money into a LASER Fund. A properly structured and maximum-funded LASER Fund can provide superior liquidity, safety, and predictable rates of return compared to most other financial instruments—and it’s totally tax-free to boot!
- Use LASER Fund indexing strategies so you can ride the market back up totally tax-free. If the market tanks again (and it will), you will not lose money due to market volatility, because your money is not actually in the market, it’s just linked to the market.
- Learn how the LASER Fund can eliminate the dangers of 1) rising taxes, 2) outliving one’s money, and 3) market volatility on your hard-earned money. Read my books, listen to my podcasts, or watch my videos to learn how this little known strategy can benefit you.
Want to learn more about some of the concepts in this article? Watch these explainer videos on our YouTube Channel!
What Is Better than a Roth, IRA, or 401k?
Is a Roth IRA or 401(k) the best way to save?
How much should I contribute to an IRA or 401(k)?
Are you ready to see the nuts and bolts of a LASER Fund? Get your FREE copy of Doug’s book, The LASER Fund. You’ll learn how to protect your “serious cash” and how to eliminate taxes on your retirement nest egg.
Disclaimer: With any mention of The LASER Fund, maximum-funded tax-advantaged insurance contracts, or related financial vehicles, let it be noted that life insurance policies are not investments and, accordingly, should not be purchased as an investment. The content contained in this post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Many traditional retirement vehicles involve risk, and the value of your investment will fluctuate over time and you may gain or lose money.