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Tax deferred retirement plans come in any number of varieties. There are IRA, 401(k), SEP IRA, 403(b), deferred compensation arrangements, etc. We are often taught that any of these plans available to us should be the first place to save and grow our money. In many cases, a retirement plan may be ineffective for wealth building and protection opportunities. Retirement plans may not avoid income taxes, but only postpone them, or actually cause a larger tax later if one's marginal tax bracket increases. Traditional planning often says that we will be in a lower tax bracket when we retire, but is that true, and do we really want a lower tax bracket to be one of our financial goals?
One should also consider reducing or avoiding income taxes as an effective financial strategy other than just postponing taxes. In addition, many consumers are never provided any information about the potential distribution problems in retirement and at death. The focus is all too often on the "tax deduction" that really does not ever exist up front. All of the benefits and potential disadvantages of a retirement plan should be evaluated before its implementation. Every consumer needs to review other alternatives with the same outlay before allocating any dollars to a tax-deferred retirement plan. It may be that a retirement plan makes sense and is the best alternative, but until a comparison with a fully coordinated program is provided, one may not come to the conclusion that a tax deferred retirement plan is always best.
If you have already accumulated money in a retirement plan and are close to or are in retirement, it is not too late to protect your money from taxes. Traditionally we are taught to defer our retirement money until age 70.5, then take out our minimum required distributions, never more. Ultimately we are to pass our tax deferred retirement accounts to our heirs who are supposed to utilize a "stretch IRA" over their lifetimes, all the while "minimizing" withdrawal taxes. Have we solved any problems by doing this or just compounded the problem, all the while never being able to spend and enjoy the money we have worked to accumulate. We have once again allowed someone other than ourselves to control our financial future.
All of our clients have an exit strategy built into their retirement plan distribution, designed to reduce and in some cases remove some or all of their tax deferred money to spend and enjoy without increasing their taxes.
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