IRA / 401 (k) Retirement Trap
By Dean Konstantine
Falling victim to an IRA or 401K, there are some very important aspects to a 401(k) or IRA account some people fail to realize.
One you can not contribute more than the allowable maximum by law into these accounts during your working years. You must also understand you are not allowed to deduct the whole amount of your annual contribution as a tax deduction. You are only permitted to detect, what ever your tax rate is. For instance most people’s tax rate between State & Federal is 34%. Therefore, only one third of your contribution to your IRA or 401(k) account would be tax deductible.
This means that if you make the maximum contribution annually into this account assuming $4000, you would be allowed to deduct $1360 from your taxes per year. This would equate to $40,800/30 years. Considering you were to make contribution for 30 periods, your total tax deduction would be $40,800 for the 30 year period. Let’s assume now, you made mistake number one, by paying off your mortgage. Great! You no longer have a mortgage deduction!Your kids are grown, and you’re not in business. What do you deduct? You have no deductions.
Now let’s say, you’re IRA or 401(k) account is eligible for you to make withdrawals of 10% as income to live on. You have no deduction; we established that, what happens? Let me show you.
Let’s say over the last 30 years you made maximum contributions into your IRA and 401(k) account. Your account grew to $500,000, now you want to begin drawing out of your account to supplement your income. You begin pulling out 10% a year, which would be about $50,000 per year. Since we know you have nothing to deduct, how much will you owe on your taxes?
If you understand the Tax system you would know your tax liability would be well over $20,000. Therefore, we can conclude that within the first two years of you receiving your retirement income from your IRA or 401(k) account without the ability to deduct anything. You will have paid back, what took you over 30 years in tax deductions to save! Hey whose retirement plan is this anyway, yours or Uncle Sam’s? Does this sound fair to you?
Additionally, if you’re withdrawing 10% a year from your account and you’re not earning at least 10% a year on your account. Very soon you may fall victim to your account running out of money. More then likely, you would run out at a time when you’re elderly, in need of all the money you can get! What about buying power of the money way into the future, now that you understand the rule of 72 you know you have even less to work with during your time of need.
Therefore, you must have a strategy that won’t leave you hanging with empty pockets at a time when going back to work to survive will be very unrewarding.
Look at it like this, would you rather pay tax on the seed or the harvest, paying tax on the seed money is much less tax burden than having to pay the tax on the harvest. Tax liabilities are very devastating and being retired and up in year’s lesson your capability of earning additional income. I mean substantial additional income to offset inflation, and any unforeseen calamities that may arise at a time in your life when it really counts.
So ask yourself the following question:
There is a right way to use your equity assets! Are you using them wrong?
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