It’s true, the Fed wants you to retire wellby Tom Wheelwright, CPA Tom Wheelright is CEO of WealthAbility, a tax and wealth advisory. He is the author of Tax-Free Wealth: How to Build Massive Wealth By Permanently Reducing Your Taxes, and The Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make. Visit wealthability.com.
Growing up, I watched my dad work.
He started a printing company with his father and his brother, and my mother, siblings and I all worked in the business. He loved the business, but I think he loved the act of working even more.
Dad was never interested in retirement. He used to say that “to retire” meant “to be taken out of service,” and that wasn’t something that interested him. He ran a small business into his late 80s. He died a year after he stopped working, a happy man who had accomplished the job at hand.
In some ways, he was ahead of his time. Many of us are rethinking what “retirement” means, challenging the notion that once we reach a certain age, we put down all work, kick back and live a quiet life at home. While I enjoy work, I love to travel and have fun with family and friends. I want to do those things as much as possible without pinching pennies.
No matter what you or your clients dream of doing in retirement, income planning is the key to making those dreams come true. Luckily, you have a surprising advocate in your corner: the government.
It’s true. The government wants you and your clients to retire well. In fact, the government wants people to invest in their retirement savings so much that it incentivizes them to do so. Advisors who understand this can help their clients reach their financial dreams much faster and with more ease than those who don’t.
Here are three retirement income planning moves the government will pay anyone to make.
Use Qualified Retirement Plans Wisely
Qualified retirement plans, such as IRAs, 401(k)s and pension plans, are the first place most people turn to when creating their retirement income strategy.
The government incentives here are well known. When you invest in a qualified retirement plan, the government gives you a tax benefit upon contribution or, in the case of Roth IRAs, Roth 401(k)s, upon distribution. The government also defers the tax on earnings inside the plan until distribution.
Recently, I reviewed the tax law of 15 countries and found 100% of them have some type of qualified retirement program. Why do so many governments do this? Because they are highly motivated to ensure their citizens have what they need to live comfortably. Comfortable citizens are far less likely to revolt. And, from the government’s perspective, the best pension program is one people fund themselves.
Focus On Non-Qualified Retirement Plans
Savvy investors don’t put all their eggs in the qualified retirement plan basket. Despite the government incentives, there are some severe limitations:
- The government tells you how much you can invest
- The government restricts what you can do with your investments.
- The government tells you when and how you can withdraw your investments
- You typically pay the highest tax rate on the money you withdraw, including your principal.
- Your 401(k) likely won’t keep up with inflation.
Instead, these investors create a retirement plan that includes investments other than the stock market, bonds and savings accounts. These may include owning a business, investing in real estate or even investing in energy or agriculture. These investments don’t come with the restrictions of qualified retirement plans, giving individuals much more latitude in how they use those assets, how much they invest and when they withdraw their assets.
These investments become even more attractive when you make them in areas that align with government priorities. The government has a long list of priorities, and it often is willing to incentivize people to help make them happen — paying you for your investment through tax credits and deductions. This strategy allows you to not just build wealth but reduce or even eliminate tax payments.
Where do you find these investments? The tax law. Of the approximately 5,600 pages in the U.S. tax code, fewer than 100 are dedicated to raising taxes. Another 400 or so are devoted to deferring taxes through qualified retirement plans. That leaves thousands of pages dedicated to other types of tax reductions. A good CPA can help you navigate this to build wealth that will never be taxed.
Don’t Forget Insurance
Insurance can also play an important role in retirement income planning. It would be tragic to create and execute on a retirement income plan only to have it wiped out in an unfortunate event.
The government wants you to protect your retirement, too. Why? There are three main reasons:
When people buy insurance, they reduce the risk of a catastrophic event, not just for themselves but for society as a whole. For example, if a natural disaster hits a community and much of the property is insured, the community is able to rebound more easily without significant government assistance. Health insurance works in a similar way. The more people who have private health insurance, the less the cost of health care falls on government sources such as Medicare or Medicaid.
Insurance companies invest in companies that promote economic development. For example, life insurance companies often hold their reserves in real estate or corporate bonds — stable investments that the government wants to promote.
Insurance reduces dependence on government income support programs. The life insurance industry pays people significant benefits, annuity payouts and disability income payments, without which many individuals may need additional government assistance.
The government pays people to invest in insurance primarily through tax deductions. For example, deductions for health insurance are worth $215 billion in the U.S., making them the single largest tax benefit in the country, according to the Tax Foundation. On the other side of the coin, life insurance proceeds are not taxable. And with permanent life insurance, such as whole life or universal life, people can use the value of their insurance to borrow from the insurance company, adding additional liquidity to their portfolio.
Make Your Move
No matter who your clients are or what their current investment portfolios look like, they all have one thing in common: They are a partner with the government.
Your role as an advisor is to help them shift from being silent partners to active partners. Silent partners earn a wage, have taxes withheld from their checks and file an annual tax return. Active partners understand what investments the government incentivizes and make strategic choices based on that information. Active partners understand that if they invest in things with government incentives, they can pay a lot less tax even as they make way more money.
Individual investors can’t do this alone. They need the support of educated advisors who have a proven system for determining which government-sponsored investments best fit their strategy and how to maximize their results. Are you ready to help?