Accounting For Retirement
Accounting for true rates of return and tax implications is often misunderstood or ignored when planning for retirement.
Whether you are just starting your earning years or ready to begin your yearning years (retirement for those who did not plan properly), understanding how to account for the tax benefits or disadvantages of your contribution strategy is essential.
Let's play a game.
Three men go on a fishing trip.
After a long day, the three men check into a lodge for the night.
The manager quotes them at $30 a night and each man puts up $10 to pay for the room.
After the men retire for the night, the manager realizes that he overcharged them.
The room he gave them was only $25, and he sends up the bellboy with 5 one dollar bills to return to the men.
The bellboy realizes that the men will not be able to evenly divide the $5 and pockets $2.
He tells the men that they were overcharged by $3 and gives them the money.
Now for the accounting.
Each man paid $10 and was given back $1.
The room effectively cost each man $9, $27 total, and the bell boy kept $2, equaling $29.
What happened to the last dollar? The problem here lies in the accounting.
When accounting for the $30, you must take the true cost of the room ($27) and add back in the $3 refund to give you $30.
When accounting for the $25, you must take the true cost of the room of $27 and subtract the $2 that the bellboy kept to give you $25.
So what is the point? Knowing when to add or subtract taxes from your investments during the retirement planning accounting process will have a dramatic impact on your rate of return and personal wealth.
Many people choose to contribute pretax dollars to their retirement accounts to postpone taxation on their funds.
The idea is that taxes will be lower during retirement.
For most people, this is false because retirees generally have less deductions (most retirees do not want a mortgage and are done making qualified investment contributions) and exemptions (most retirees do not have dependents in their household).
Also, this country has historically seen taxes as high as 90%, so paying taxes while they are "on sale" is not a bad idea.
Many people accomplish this through the use of Roth IRAs, which fall into the category of qualified retirement plans.
But qualified with whom? The IRS.
You see, the IRS offers tax incentives and in exchange places many restrictions on the way we manage these funds, especially during distribution.
Roth IRAs have limits on annual contribution amounts and people who have annual taxable income in excess of $100,000 are not eligible for Roth IRAs.
Withdrawal too early and you will be taxed, and if you borrow without paying back the funds and you will be taxed.
These funds are also subject to double taxation in the event of transfer to non spousal heirs.
In regards to associated tax implications, Roth IRAs are a step in the right direction.
However, there are still too many strings attached due to it being a qualified retirement account.
An investment grade life insurance policy would be an example of a non-qualified retirement account, meaning that contributions to it are not tax deductible.
The fund growth is tax free and you can borrow from the cash value tax free and never pay back a dime.
You can contribute as little or as much as you would like annually.
The transfer upon death is tax free and when there is a secondary beneficiary named, transfer to non spousal heirs is tax free.
So how can you fund this kind of investment and still receive a tax deduction? The answer is all around you.
Far too many people keep their wealth locked up in the equity of their homes, reducing safety, liquidity, and ROI for that property.
Having the money outside of your home allows you access to it in case of a job loss (good luck getting a HELOC with no employment) or other financial need and also allows it to grow at a much greater rate, managed in a way that is right for you.
Refinancing your home and pulling out home equity to fund your life insurance gives you a greater tax deduction for the interest that can be carried into retirement, not to mention the immediate death benefit created through the policy.
So before you decide to take the road followed, consider accounting for the true return on your hard earned dollars and how much more you will need for retirement.
More wealth is lost to unnecessary taxes than anything else.
Consider a non qualified retirement account.
Whether you are just starting your earning years or ready to begin your yearning years (retirement for those who did not plan properly), understanding how to account for the tax benefits or disadvantages of your contribution strategy is essential.
Let's play a game.
Three men go on a fishing trip.
After a long day, the three men check into a lodge for the night.
The manager quotes them at $30 a night and each man puts up $10 to pay for the room.
After the men retire for the night, the manager realizes that he overcharged them.
The room he gave them was only $25, and he sends up the bellboy with 5 one dollar bills to return to the men.
The bellboy realizes that the men will not be able to evenly divide the $5 and pockets $2.
He tells the men that they were overcharged by $3 and gives them the money.
Now for the accounting.
Each man paid $10 and was given back $1.
The room effectively cost each man $9, $27 total, and the bell boy kept $2, equaling $29.
What happened to the last dollar? The problem here lies in the accounting.
When accounting for the $30, you must take the true cost of the room ($27) and add back in the $3 refund to give you $30.
When accounting for the $25, you must take the true cost of the room of $27 and subtract the $2 that the bellboy kept to give you $25.
So what is the point? Knowing when to add or subtract taxes from your investments during the retirement planning accounting process will have a dramatic impact on your rate of return and personal wealth.
Many people choose to contribute pretax dollars to their retirement accounts to postpone taxation on their funds.
The idea is that taxes will be lower during retirement.
For most people, this is false because retirees generally have less deductions (most retirees do not want a mortgage and are done making qualified investment contributions) and exemptions (most retirees do not have dependents in their household).
Also, this country has historically seen taxes as high as 90%, so paying taxes while they are "on sale" is not a bad idea.
Many people accomplish this through the use of Roth IRAs, which fall into the category of qualified retirement plans.
But qualified with whom? The IRS.
You see, the IRS offers tax incentives and in exchange places many restrictions on the way we manage these funds, especially during distribution.
Roth IRAs have limits on annual contribution amounts and people who have annual taxable income in excess of $100,000 are not eligible for Roth IRAs.
Withdrawal too early and you will be taxed, and if you borrow without paying back the funds and you will be taxed.
These funds are also subject to double taxation in the event of transfer to non spousal heirs.
In regards to associated tax implications, Roth IRAs are a step in the right direction.
However, there are still too many strings attached due to it being a qualified retirement account.
An investment grade life insurance policy would be an example of a non-qualified retirement account, meaning that contributions to it are not tax deductible.
The fund growth is tax free and you can borrow from the cash value tax free and never pay back a dime.
You can contribute as little or as much as you would like annually.
The transfer upon death is tax free and when there is a secondary beneficiary named, transfer to non spousal heirs is tax free.
So how can you fund this kind of investment and still receive a tax deduction? The answer is all around you.
Far too many people keep their wealth locked up in the equity of their homes, reducing safety, liquidity, and ROI for that property.
Having the money outside of your home allows you access to it in case of a job loss (good luck getting a HELOC with no employment) or other financial need and also allows it to grow at a much greater rate, managed in a way that is right for you.
Refinancing your home and pulling out home equity to fund your life insurance gives you a greater tax deduction for the interest that can be carried into retirement, not to mention the immediate death benefit created through the policy.
So before you decide to take the road followed, consider accounting for the true return on your hard earned dollars and how much more you will need for retirement.
More wealth is lost to unnecessary taxes than anything else.
Consider a non qualified retirement account.