My name is Garrett Gunderson and every now and again I get this reputation. It might have been because on the very front cover of Killing Sacred Cows, which is kind of a hardcore title, it said, “The Great 401K Hoax,” that I’m a 401k hater. Okay, it’s not just for one case. It’s simple IRAs. Sep IRAs RSPs for our Canadian friends.
It’s any government qualified plan that has us merely deferred tax, because I don’t know what taxes are going to be in the future. The US alone has 20 trillion dollars a debt right now. How do they pay for that? Through taxation. What happens if you make more money in the future, which hopefully you do, have less tax deductions because maybe your kids have left the home and they’re not tax deductible anymore or even if they’re too old still living at home.
You don’t get to write them off like you used to, right? Or maybe the government just raises the taxes because in 1913 when this whole thing started it was supposed to be temporary. It’s feeling fairly permanent now and if we look at the top average bracket, it’s well over 50% on the highest marginal bracket since it started, so we’re at a historical low today.
So what do you do or how do you handle these 401k’s? Well first you can always move them to self-directed IRAs. The advantage of that is sometimes you get a checkbook with that known as a checkbook Ira or an IRA LLC are some of the kind of nicknames for it where you can invest in more than just the stock market or brokerage.
That might be into real estate. It might be in the businesses that you don’t have full control over. There’s other opportunities inside of there. That would be one thing. Second would be a rescue strategy. A rescue strategy is you can move to a Roth for one time as an exclusion. Now some of you might make too much money to contribute new distributions or contributions to a Roth but you can convert your old qualified plans to a Roth one time.
That is going to trigger a tax, but there are ways to get valuations on a rescue strategy that might be lower than the actual cash flow benefit you get from the plan. That might reduce your taxes half depending on how its structured. One example would be a structured annuity where maybe you have all these people that are winning lottery and they spend too much money and they need all of their future distributions.
Now, there’s entities and organizations that will say, “Great! We’ll buy it out for pennies on the dollar or dimes on the dollar” essentially. And so when you get that valuated for tax purposes, it’s going to be lower than the actual cash flow you bought. That’s just one example there. Or maybe even move it to that self directed into a 72T distribution.
A 72T allows you to avoid the 10% penalty. Which, penalty is a scary word. I went to Catholic school. That’s rulers on the hand. Right? So a penalty that you might want to avoid you can do that. If you take substantially equal payments for a minimum of five years or till age 59 and a half and there’s three different kind of evaluations of the IRS does on how much you can take that when you select that no 10% penalty on getting some cash flow outside of that plan because my biggest concern is what if all that gets taxed in one year?
Sure, there’s things called Stretch IRA’s, which you can pass it on for generations without triggering the tax in one given year. But how do you eventually benefit or utilize that money? If you’ve never utilized the money it’s a hundred percent tax because you never benefit from it. If you lock the money away because you hate tax today,
you think it’s a tax advantage in deduction. It’s just pre-tax money that you delay and you pay tax in the future. Now some people believe, “well, I’m accumulating more money.” Yes, but so is the government. If taxes remain the same you’ll end up with the net amount. If you put it in a Roth or if you put it in a pre-tax traditional IRA.
There is no magic.
Let me demystify it. Yes, they get more and then you end up with the same amount if you had to pay zero tax with after-tax dollars than if it went pre-tax dollars. Where it’s dangerous is that the taxes go up, you go to take it out and you actually have a reverse tax advantage. It’s a negative tax implication because of deferral. So in review: #1, you can roll the self-directed and open up more opportunities of where you can invest you could take that self-directed and maybe do a rescue strategy where you do like a structured annuity where you get a lower valuation into a one-time conversion over to a Roth or you might do a 72T distribution where you start getting that money out without the 10% penalty. But first and foremost if you have any high interest rate loan, stop funding these retirement plans to pay off high interest rate loans.
That is a guaranteed savings.
It’s going to boost your cash flow. Invest first and foremost in yourself, if you’re not sure where you’re invested, how you’re benefiting from it, where your exit strategy is or how you going to get to that tax efficiently, increase your financial IQ so you’re better equipped.
And if you want to learn more you can always go to wealthfactory.com/megakit.
We’ve got amazing resources there for you that we can put in your hand. So you go, “how do I Implement what Garrett’s talking about?”
That’s going to build a bridge of great content, information and resources.
And later on you might choose to even hire us or work with us to do some of the support, but I wanted to add value to you right from the beginning.
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