Why Didn’t My Advisor Warn Me About That?

One of the common themes we find in financial planning can be somewhat of an oxymoron. Most people follow the traditional paradigm of advice to sock away as much money as they can into their retirement plans, like 401(k)’s, and IRAs, but then find out it may not always be the best recommendation when retirement comes, and Uncle Sam has his hand out.

Misconceptions

Many financial advisors, even the celebrity ones, tend to agree that you should obviously take any employer match, then focus on reinvesting elsewhere to achieve a different objective. We often find that one of the largest misconceptions investors run into is having too much money in qualified retirement accounts, such as 401(k)’s and IRAs.

Too much money?? Is there such a thing?

Imagine that you’re retired, and you’ve got a $10,000 vacation earmarked in your retirement savings account. All of a sudden, you realize you could have to take out $12,500 to pay for it instead. Think about that on a larger scale for a new car, home repairs, etc. — then consider it for your living expenses every month for the next 30 years!

Ticking Tax Bomb

While it may sound great, and many TV commercials may lead you to believe, that you could have $500,000 – $1,000,000 or more in retirement accounts, this may also become a “ticking tax bomb” in your later years. It may not feel like it, but currently, taxes are on sale!

Marginal tax brackets are currently the lowest they have ever been for many savers and while putting away as much money as possible in retirement accounts may sound like a good plan, it could substantially hinder your retirement income.

What do I mean by this?

There has been a rule of thumb for decades that you could withdrawal 4% per year off of your investment assets throughout your retirement years and your savings should last. While this percentage is debatable, then the current standard tax deduction of $12,950 per taxpayer ($25,900 – married, filing jointly) would deem that $200-300k per taxpayer ($500-600k jointly) is the maximum amount to have in qualified retirement accounts before the withdrawals become fully taxable.

This is exclusive of your Social Security Benefit as well. You mean to say there is such a thing as too much in retirement accounts?? Yes! If you want the IRS check out of your retirement, there are some important planning rules to follow. Having retirement pension income would make this amount much less.

Kicking Uncle Sam out of your portfolio

In our opinion, kicking Uncle Sam out of your portfolio may have much more of a beneficial effect on your lifetime income planning than chasing the difference of say 7% or 8% with your investments in the market. A penny saved is a penny earned!

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Future income streams

For this planning, we like to not only diversify client’s investments, but also future income streams. Considering Roth IRA Conversions in lower income years, like early retirement or maximizing conversions before you reach the next tax bracket may be advantageous, especially before age 72, when required distributions begin. Roth IRA funds are never taxed again once they are contributed and remaining balances could even be inherited tax-free to your children as well.

Properly designed life insurance policies

If you earn too much income to contribute to a Roth IRA, or if $6,000 ($7,000 over age 50) isn’t likely enough savings for the tax-deferred accumulation and future tax-free income, a properly designed and funded life insurance policy could be designed to mimic many of the same tax-advantages of a Roth IRA.

This is typically used as an alternative supplement to retirement income after other vehicles are maximized with less overall investment risk. This could be a permanent whole life policy or preferably a maximum funded indexed universal life insurance policy. We believe it is important to work with an experienced professional as these plans can vary greatly on costs and benefits. They have no contribution limits or income limits when designed properly.

Proactive income planning

With proper proactive income planning, many consumers could be able to design a tax-advantaged retirement with a 0%-10% tax bracket, others could plan to be in the bottom tax brackets, given enough time to implement educated planning.

For a complimentary financial planning evaluation, reach out to Douglas Marion with Advanced Wealth Strategies, conveniently located in Cornelius at 19520 W. Catawba Avenue. Feel free to call or text (704) 765-3653 or email Douglas@PlanWithAWS.com. As fiduciaries, their independent firm will prioritize your best interests.

Douglas Marion

Douglas Marion manages Advanced Wealth Strategies. He meets with clients interested in investment management, income planning, and creative insurance services.

Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Adviser. AlphaStar Capital Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level or skill or ability. Insurance products and services are offered through Advanced Wealth Strategies by individually licensed and appointed agents in various jurisdictions.

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