Tax-free Retirement Planning that is hard to outlive in Orange County, California

Due to the rise in our deficit (paying $1 trillion per year on interest only) we are headed for higher tax brackets. The only way you’ll NOT run out of money is if you have some tax free strategies in your retirement plan. As you can see from the graph, sometimes tax-free is actually more when you consider how much you need to make just to cover the taxes and the haircut it gives your funds. To find your equivalent taxable rate you take the rate of return and divide that by your tax bracket (e.g., 28% etc.) and viola you have your equivalent taxable rate. In the example if you’re earning 4.5% in a tax free vehicle, and are at a 28% tax bracket…you’re earning the equivalent of 6.25% because you’re tax free and that is significant.

I have seen several clients retire on their IRA or 401(k) and they get hammered at ordinary tax rates usually in a higher tax bracket if they’ve been deliberate in being successful. You can always retire poor and live on the system while it is available but I don’t think people set out to do that…at least I hope they’re not going into retirement poverty by choice. Out of 100 people turning 65 right now, only 4 of them will be financially independent and the rest will be reliant on family, charity, government or a large portion are still working. In fact there was an article about octogenarian’s having to go back into the work force because they’ve run out of money. The typical deferral for all those years only lasts 18 to 24 months of your retirement as taxes ravage your income and usually without the tax deductions. Also, if you don’t take the distributions (MRD) by the time you’re 70 1/2 there is a penalty of 50% + the ordinary tax, about 70 to 75% of that distribution is devoured just because you didn’t need it and the government forces you to or they’ll penalize you.

Here are a few thoughts if you don’t want to end up as a greeter for a convenience or department store, you know the places I’m talking about. Also some are working as fast food window servers, tele-marketers, night watch persons, seat attendants at stadiums and I was at a restaurant recently and saw one on one knee with knee pads scrapping gum off the floor and this was not a hobby. Think about how difficult these things really are to do when you slow down and the body and mind don’t function like they used to. You are supposed to be doing other things…my people like to go on trips and send me post cards from exotic places. Some like to volunteer and give back to charity…but no schedule of showing up 8am to 6pm with an hour lunch.

So what do I need to be thinking about? Well, I’m glad you asked because here is the personal inventory:

1. What are my current retirement assets earning?
2. How much are the costs/fees associated with my current investments?
3. Are they tax-free?
4. Do I qualify for ROTH IRA or a self-directed solo-401(k) ROTH since I’m self-employed?
5. Are there any Municipal Bonds I could use?
6. Do I have savings grade life insurance that builds up tax deferred and is accessed tax-free and carries a death benefit and final expense?

Most people do not follow or track their portfolio and know what they’re earning, they just know it is down or up but don’t even know by how much. The old adage of when does a negative -30 + 43 = 0 does not seem to resonate with most and there needs to be more accountability on our future retirees to know what they have and what it is doing. We know one geo-political event like terrorism can knock our market down by 50% and they are trying something every few months. The market was devastated for a long time after 9/11 and many people lost millions over night and never recovered since stocks tanked in March 2003.

Are there any municipalities we can rely on that are not running their budget like a ponzi scheme since they are taking in tax dollars to pay for last year’s expenses and just raising taxes. It is only a matter of time before things catch up with some of these local governments and a scary domino effect starts. While I like real estate there have been some many pirates schlepping that stuff and the only one making money is the pirate because they are buying low and selling really high to unsuspecting people because it is hard to really get into the numbers on a property unless you visit the area and bring in all the factors.

We are running out of time before some of the nastier taxes tucked into the Health Care Reform act take effect as well as The Deficit Reduction Act gets full swing for people to start taking back their retirement and stop the bleeding that will occur on your nest-egg when you start taking out the income at the higher ordinary income rates.

In your service,

James Burns, Esq.

Learn Tax-free now

(949) 231-9979

Tax Free Income for Life

I’ve been working on my new program which is going to be essential as Congress is likely to shift the entire marginal tax rate making your deferred plan (IRA or 401(k)) obsolete. You’ll want to take a look at our two vehicle system to build up tax-free.

One of the vehicles is the Solo-401(k) ROTH self-directed plan. This vehicles does not have income limitations on the $165,000 for a couple filing jointly the way the ROTH IRA does. It is designed for solo-practitioners, those without employees or contractors or part-time people.

Since it is ROTH you pay your taxes up front but never pay again on the build-up or when you take monies out in the future. Traditional deferred plans allow you to defer taxes but get hammered when you retire if you are in a higher tax bracket and without tax deductions to offset which is uniformly the case for a retiree.

You can contribute up to 25% of compensation and additional catch-up is available for those 50 or older. A $41,000 annual limit applies and is indexed in the future up to 2010 unless the new regime changes things when they are sworn in as President and one could be higher than the other. A cap of $205,000 on compensation  was in force as of 2004 and is indexed up to 2010. The benefit is that you can set aside more tax-free money in the solo-401(k) ROTH than other plan choices and if it is self-directed, you do have to remain victim to what the market provides as you can have numerous choices for guranteed returns that are not connected to the market at all.

Remember this is just one half of a dynamic duo that provides for tax-free income for life. You’ll want to examine the seld-directed arena so that you’re not held to just mutual funds and other market connected investments that are roller coaster driven because they are up and down according to whimsical financial and political events.

If you have questions or are looking to set one up or need information on the “Dynamic Duo” you can find our e-book “Tax Free Income for Life” available on the website.

Untaxingly,

James Burns