When you started saving in your 401(k)/403(b) plan you probably did not think I want to go into business with the Government, but that is exactly what happened. Qualified retirement accounts (401(k), 403(b) IRAs) were a great deal when they were set up because the top tax bracket was 70% and the median tax bracket was 39%. Compare that with today’s top bracket of 37% and median tax bracket of 24%. This means when the Qualified plans started you were much more likely to be in a lower tax bracket when you retired and pay a lower tax. Today very few people retire in a lower tax bracket. The elephant in the room is that you do not own all of your Qualified Retirement Account. When you factor in federal and state taxes it is probably more like 70%-75% of the value it if not less. If you have a $1,000,000 IRA and are in the 24% federal tax bracket and 5% state tax bracket you would actually only own $710,000. There is another factor that you need to consider and that is Required Minimum Distributions. Your business partner wants their money and is going to require you to take it out starting at 70 and a half. If you fail to withdraw enough your business partner hits you with a penalty of 50% of what you should have withdrawn. Is it fair that you put up your money and the government gave you a tax break for one year, for them to share in the growth and when you start to take it out get 20%-45% of anything you withdraw and control what tax bracket will apply? With 23 trillion in debt do you think it will realistically go down? I’m Italian and that seems outrageous to me.
My company’s mission is to help people analyze how and when to use all of your resources for retirement. In this case it would be to strategically buy out your business partner, while still providing income when needed. For some this may mean they need to stop funding the 401(k) and look at other options such as Roth and 7702 plans. We can analyze and give you the facts so you can make an educated decision. We believe that education is key to your success. There are very few bad products, but often poorly placed products. I believe that the goal for retirement should be to create an income that meets your needs with the least amount of risk. These risks are market, longevity, health and taxes. It is challenging to eliminate all of these but in my opinion buying out a bad business partner is a great place to start.
We are here to help.
Steve Gaito, CFP®