* American's have an estimated $24 Trillion in retirement assets.
* The entire gross national US debt is just $18 Trillion, making the retirement market 33% larger.
* There are more than 600,000 people with $1 million in an I.R.A. account; 630,000 from the Government Accounting Office Data from 2011, so there are no doubt many more now.
* More than 300 folks have $25 million or more in their IRA's. Since contributions to IRA's are capped at rather low amounts, the majority of this money was no doubt rollovers from company-retirement plans.
* Defined Contribution Plans, sponsored by employers, total $6.6 Trillion, about a trillion dollars less than I.R.A. account values.
So. Although this is very interesting factoids about I.R.A.'s and retirement plans, what's the take-a-way on this after about 30 years these accounts have been offered and funded.
My first thoughts are that the U.S. government knows all the details about your retirement accounts. You report much of it on your tax forms each year; deposits, withdrawals, year end balances. Next, specific rules are in the law that you must follow along the way to retirement and well into retirement perhaps years from now. They are not easy to follow.
For example: take your retirement money too early – a penalty is due. Put in too much money above their limits – a penalty applies. Take out too little money starting retirement (generally after age 70-1/2), penalty applies. I can see the rationale on this from the Governments view: they gave you the tax break on the money on the way in; so they want their tax when you retire. It was not counted as salary as earned, but now it’s treated as salary when you take distributions.
Some troubles to be aware of: Retiring Early – due to a great pension plan at work, or you were fortunate in your other ‘non-retirement’ assets. You cannot access your IRA money at 56 or 57 without a penalty, 10% normally. 59-1/2 is the rule. It’s your money, and you owe a penalty after having retired? I know folks in this quandary.
Taxes: Oh, yes, the sticky wicket of taxes owed when you pull out your retirement money. That $300,000 in those IRA’s and 401-k’s is now $225,000 net to you after the 25% taxes owed. It’s taxed as a salary would be on your tax return; that’s called ordinary income. The rates range from 10% to 39.6% for 2014. It's a progressive tax; the higher earners pay a larger percentage. The lower capital gains tax rates (if you owned stocks or mutual funds and sold them) are not available to you. Sorry.
The other argument bandied about by the financial media is: you will be in a lower tax bracket when you retire – not always the case: it will depend on a lot of factors outside of this discussion. Plus, the Government is constantly monkeying with the rates anyway, and will find a way to get their ‘pound of flesh’ from you, be it through retirement withdrawals, Social Security taxation, or other nefarious schemes. It can be done, but you have to tax plan diligenltly throughout the year.
The Seed and the Harvest
A workshop I attended last year placed this all in perspective with a presentation on retiring tax free with unlimited amounts of funding for this particular investment. Quite unique if you fit the profile. Anyway, let’s assume you are a farmer plowing a field in the summer, laying down your seeds for the season’s planting, hoping for a bountiful harvest this fall. Your IRA account is being taxed as the ‘harvest. You pay tax on the seed (your contributions), plus the crops growth (your investment growth + dividends paid on your seeds). And, unlike a business, you can’t deduct your expenses for the upkeep on your farming operation (i.e. commissions, fund expenses, management fees, investment losses). A ROTH IRA is an excellent choice for the younger crowd who can save after tax funds over many years and be assured of no taxation down the road. No deduction on the contributions, no tax when withdrawn. That’s paying on the seed, not the harvest.
I recommend to own both types of accounts; IRA’s and qualified plans like 401k and 403b, etc., and to have outside money in taxable accounts that you can access prior to retirement age. Each will have different objectives to some degree, with the end goal of being tax efficient when you need to spend the money. If you need help figuring this out, call upon me for a meeting, and maybe you can avoid or mitigate the tax man’s involuntary tithe that’s coming down the road upon retirement.
Barry L. Unterbrink
Chartered Retirement Planning Counselor (954) 719-1151
Fort Lauderdale, Florida