The greatest risk an investor faces is running out of money during retirement... or going bust before retirement. Why would you put a tax shelter in a tax shelter? Now that's a question I have answered many times. In public educational programs and seminars including agent/broker continuing education seminar programs I have been asked, why would you put a tax shelter inside a tax shelter?
And, from some of the nation's higher-powered financial planners, people with more professional designations behind their name than they can get on one line, they too have posed the question, why would you put a tax shelter inside a tax shelter? Well, first let me say for me personally, I want to be assured my retirement plan will be available on the day I retire.
Now their real question is, "Why would you put a qualified retirement plan in an annuity, or a tax shelter inside a tax shelter?"
I'm sheltering my retirement plan not only from the IRS, but from market crashes, corporate scandals, bankruptcies, and the likes of Enron, WorldCom, and Bernie Madoff, just to name a few. I'm also going to avoid the IRS forced liquidation sale at loss, from which one can never recover.
What is the IRS forced liquidation sale?
At age 70½, we are forced to take required minimum distributions (RM) from qualified retirement plans, with the exception of Roth, and when the market is down, we are selling at a loss from which we can never recover because those shares of stock were already sold. Also, note that the RMD dollar amount is based upon the dollar value of the plan as of December 31st of the prior year, requiring us to cash out a larger number of shares at a loss.
The market crash of 2000 and 2001 caused many people to continue RMDs for a span of seven to eight years at a loss, and when the market recovered, it crashed again almost instantaneously. Fortunately, legislation waived the RMD requirement for the tax-year 2009.
Now consider this:
People with qualified retirement plans invested in the market give up the IRS tax incentives that encourage risky investments.
- Dollar cost averaging and capital gains tax do not apply to qualified retirement plans invested in the market. Distributions are going to be taxed as ordinary income.
- Stepped up cost basis does not apply to qualified retirement plans invested in the market.
- Capital loss write-off does not apply to qualified retirement plans invested in the market... you're out the money.
Now tell me, why would anyone invest his or her qualified retirement plan in the risky market? Does risk increase the rate of return or does risk increase the probability of loss? For those who enjoy the thrill of bungee jumping on Wall Street, perhaps they should first shelter their tax shelter, providing a balance wheel of stability and a safety net.
For qualified retirement plans, stretch IRAs, Roth IRAS, and Roth conversions, consider the fixed annuities and fixed-indexed annuities with 7 percent to 10 percent premium bonuses and 8 percent lifetime income benefit riders, now available, that guarantee retirement income for life. I'll keep my tax shelter sheltered for life with income streams beyond my life.
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