Qualified Retirement Plans May Reduce Spendable Income

The largest block of retirement savings in America is in ERISA qualified defined benefit and defined contribution plans: totally tax deductible. But as a consequence of using an ERISA plan comes the loss of recoverable basis. All ERISA qualified plan income is taxed at ordinary income rates and is included in the provisional income test for Social Security benefit taxation. Taxes are the number one expense in retirement and can erode the cash flow necessary to meet essential retirement spending as well as restrict discretionary spending, i.e. no fun money.

To combat the present 20 trillion dollar debt and 60 trillion in future obligations, taxes must go up and that’s not factoring in any budgetary spending increases. It is inevitable that Millennial retirees will pay a significant portion of their retirement plan dollars and Social Security benefits to taxes, perhaps up to 40%! None of this includes the true cost of living that could impact the purchasing power of your retirement dollar. The qualified plan trap will ensnare many unsuspecting seniors fifty years from now. Many Millennials are convinced there must be a better way. And they’re right. There are some little-known tax favored funding vehicles that you can take advantage of today. (And just a FYI, this is under current tax code, which could change.)

The four tax-free funding vehicles are health savings accounts, Roth IRAs, cash value life insurance and Home Equity Conversion Mortgages. The last two are collateralized loans against a cash value life insurance policy and the equity in your home. Roth IRAs have some ERISA regulations attached to them, but no required minimum distributions. The last three are not tax deductible, but they accumulate tax deferred and can generate tax-free distributions. Health savings accounts are also tax deferred and can generate tax-free distributions, but are also tax deductible. Heath savings account distributions can be used only for medical expenses and insurance premiums like long-term care, disability and health insurance, as well as Medicare premiums. The combination of all four could be significant in retirement because of the tax-free distributions that are not includable in the provisional income test for Social Security benefit taxation. More information on these follows in the next three press releases.