A Roadmap to Retirement
Whatever your age, it is never too soon to look
ahead and begin giving thought to your retirement.
When the time finally comes, if you've done the proper
planning, the transition will be smooth and you will
feel comfortable and secure about it.
Today, more than ever, as the society we live in
becomes more demanding, planning for retirement is a
necessity. You must plan ahead by setting goals and
deciding how they will be met. Retirement planning
also means getting ready for a lifestyle change as well
as a changing financial picture.
You may be faced with some hard choices. If it
has been difficult to accumulate the essential funds
necessary to enjoy a truly "worry-free" retirement, you
may find yourself choosing between dining out more
frequently or preparing more meals at home. You may
find yourself having to choose whether to put your
spouse, the man or woman with whom you've spent the
last 50 years, into a no-frills nursing home or a
nursing home with big bay windows, a view of the ocean
and a private sitter. Many retirees find themselves
balancing between having a sufficient life style and
lacking some of the comforts that make life easier. In
addition, you may find yourself considering just how
much or how little you want to leave to your children.
These difficult decisions can be made easier, with
proper planning, savings, and investing done ahead of time.
Investing for a future lifestyle
Although pre-retirement and post-retirement
investment portfolios should each have both income and
accumulation aspects, your pre-retirement portfolio
should be more heavily weighted toward accumulation for
later use. A post-retirement portfolio should show a
greater allocation of investment resources toward
income-producing vehicles, with a portion allocated for
accumulation, in order to be able to create a greater
income in the future; inflation will erode some of the
purchasing power of current income-producing
investments.
You can use different investment management
techniques as you create your own portfolio and
consider the different investment alternatives
available to you.
Tailor make your investment portfolio
Diversification, or spreading your investible
assets among a group of different investments, is
insurance against a severe crisis every few years and
avoidance of the old "feast or famine" characteristic
of investment markets. Diversification is used to
create a margin of safety in the portfolio by spreading
you investible assets among various groups, including
mutual funds, variable annuities, life insurance and
fixed-return savings accounts, such as money market
funds. Today the majority of all retirement assets are
contributed to tax-deferred retirement plans through
employers or through individual retirement accounts.
The fact that Uncle Sam allows contributions to be
made on a tax-deductible basis, as well as allowing
tax-free accumulation, is the ideal stimulus for
increasing the amounts which go into the above
retirement choices.
At the top of most lists are mutual funds.
Choosing a family of funds is the wisest approach.
Under this arrangement you will be able to take the
amount allocated for mutual funds and break it down
further by positioning a specific percentage to either
income funds, growth funds, or a mixture of both. In
addition, these same families of funds can provide
municipal bond funds, which distribute tax-free income
when you want it most -- at retirement.
While mutual funds represent the largest source of
retirement funds, in order to maintain a diversified
portfolio, you must include annuities, fixed or
variable, as well as life insurance. The latter will
also establish a basis for a sound estate plan.
If you are financially independent at retirement,
it can become a time of new opportunities, a time to
try a second career, to develop a new lifestyle or to
pursue new dreams and goals. Instead of a period of
boredom and disenchantment, retirement can be your most
stimulating, fulfilling time ever -- your true golden
years.
You can retire rich
What is the idyllic way to spend your retirement
years? Travel to all the exotic places you never had
time to before? A beach home where the sun always
shines? A cozy mountain retreat? However you picture
it for yourself, it's going to be a lot harder to
achieve than it was for your parents' generation.
With Social Security cuts and rising health care
costs clouding the future, most Americans are worried
about funding their retirement. But sticking to a few
simple strategies, you should be able to retire
comfortably, or with a little luck, lavishly.
Your company's retirement plans may be more than
enough to feather your nest, especially if your firm
offers a 401(k) plan. These plans allow you to deduct
up to nearly $9,000 annually from your pre-tax income
and place it in a managed investment fund. Often,
matching funds are pitched in by your employer. Put
away the maximum amount, and you could find yourself
with $500,000 in savings after 25 years.
If you're successfully self-employed, you can set
aside an even higher percentage of your income as
savings. Keogh plans and SEPs (simplified employee
pensions) allow you to save up to 13 percent of your
income tax-free, and you can salt away up to 20 percent
of your income in a Keogh (to a maximum of $30,000) if
you agree to put away the same percentage of your
income each year. Most such plans offer productive
interest yields.
A growing number of two-income families are
tightening their belts for the future by undertaking to
save or invest one spouse's entire earnings. Doing so
may require you to forego some luxuries in the present,
but prudent investment of the "extra" income in savings
plans, mutual funds, and insurance can pay off big in
your golden years.
The road to retirement comfort can also be paved
with real-estate investment. Some families have put
their savings into the purchase of one or two multi-
family rental units. Once your units are paid for, you
can turn profit on them through rental revenues and tax
breaks for homeowners. You can then plow the profits
back into savings and investment, giving yourself more
padding for a plush future.
IRAs are still one of the best wealth-builders around
Nobody likes to pay taxes, and nearly everybody is
concerned about retirement. Yet many investors neglect
or underutilize one of the best ways to escape the
taxman's clutches -- the individual retirement account.
IRAs have declined in popularity since Congress
disallowed tax deductions on IRA contributions for most
individuals with employer-sponsored pension plans. But
the biggest advantage of an IRA, the ability to shield
investment earnings from income taxes, remains intact.
To utilize IRAs fully, you must know both how to
exploit their tax advantages and what investments to
put in an IRA. In many respects these objectives are
interrelated. IRAs should be viewed as part of your
overall portfolio. If income stocks, bonds, or income
funds have a place in your portfolio, place those
securities in an IRA. That way, dividends and interest
payments, normally taxed each year, can comdollar tax
free.
All else equal, your lowest-yielding stocks should
be held outside an IRA. Taxes on capital gains are
deferred until a stock is sold, so an IRA's tax shield
is not as valuable. In fact, by putting a capital-
gains vehicle in an IRA, you forever lose the ability
to pay lower capital gains taxes on the gains. All
gains are taxed at ordinary rates upon withdrawal from
an IRA.
If you plan to sell a stock after a couple of
years, however, holding it in an IRA may be worthwhile.
But losses on assets held within an IRA are not tax
deductible, so highly speculative investments should be
kept outside your IRA. Whatever you do, don't put
variable annuities, municipal bonds, or other tax-
advantaged vehicles in an IRA. Municipal bonds pay
lower yields because the interest they pay is tax-
exempt, but that interest will be taxable when
withdrawn from an IRA.
Seeking the Ideal Retirement Investment
There are many possible investments available
today which can be accumulated for one's "retirement
nest egg." Some examples include:
Certificates of Deposit Mutual Funds
Stocks and Bonds Municipal Bonds
Deferred Annuities Real Estate
. . . plus many others, including Qualified
Retirement Plans.
However, the complexity of today's tax laws and
government regulations which pertain to Qualified
Retirement Plans has prompted many people to seek
alternative ways to provide for their retirement years.
DESIRABLE FEATURES IN A RETIREMENT INVESTMENT
- No legal, accounting, or actuarial costs.
- No annual administration costs.
- No complex rules regarding discrimination.
- A provision for automatic withdrawal of money
from one's checking account or paycheck.
- A conservative investment policy.
- A death benefit which is income tax free.
- Contribution of pre-taxed dollars.
- Tax-free accumulation of funds.
- Withdrawal of funds without penalties or
taxation.
The Accumulation Process
There are three basic phases to accumulating one's
"retirement nest egg." Those phases are:
- The Contribution Period
- The Accumulation Period, and
- The Withdrawal Period
PERIODIC CONTRIBUTIONS
³ ³ ³
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³ ³ $ ÉÍͼ ³ YOUR ³ ÈÍÍ»
³ v ÉÍͼ ³ RETIREMENT ³ ÈÍÍ»
³ $ ÉÍͼ ³ NEST EGG ³ ÈÍÍ»
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º º
ÉÍͼ ACCUMULATION YEARS ÈÍÍ»
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TODAY º º º º$ º º º DEATH
³ $ ³ $ ³ ³ $ ³ ³ ³
³ $ ³ $ ³ ³ ³$ ³ ³
v v v ³ ³ $ ³ ³
CHILDREN'S NEEDS ³ ³ ³$ ³
College ³ ³ ³ $ ³
Weddings v v v v
etc. RETIREMENT
WITHDRAWALS
WILL THERE BE ENOUGH IN YOUR RETIREMENT NEST EGG?
Taxation While Accumulating The Nest Egg
In comparing various types of investments, one
must consider the question of income taxes. Most
investments are taxed during one or more of the three
phases of building the retirement nest egg.
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º 1. TAXATION DURING THE º
º CONTRIBUTION PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º Are Contributions made with: º
º º
º 1. Pre-tax dollars, or º
º º
º 2. After-tax dollars º
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º 2. TAXATION DURING THE º
º ACCUMULATION PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º Are Earnings Taxed: º
º º
º 1. As Income is Earned, º
º º
º 2. As Assets are Sold, or º
º º
º 3. Not Taxed During º
º Accumulation Period º
ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍͼ
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º 3. TAXATION DURING THE º
º WITHDRAWAL PERIOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄĶ
º When Withdrawn, Are Funds: º
º º
º 1. Fully Taxable, º
º º
º 2. Partially Taxable, or º
º º
º 3. Not Taxable º
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Proper tax deferral or avoidance will result in a
larger retirement benefit.
Potential Problems When Comparing Investments
There are four basic methods of taxing an
investment as illustrated in the following chart:
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º º EXAMPLE OF THIS º PRE-TAX or³ TAXABLE ³ TAXABLE AT º
º TAX º METHOD OF º AFTER TAX ³ DURING ³ DISTRI- º
ºMETHODº TAXATION º DEPOSITS ³ ACCUMULATION³ BUTION º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 1 º CERT. OF DEPOSIT º AFTER TAX ³ YES ³ PARTIALLY º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 2 º QUALIFIED PLAN º PRE-TAX ³ NO ³ FULLY º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 3 º MUNICIPAL BONDS º AFTER TAX ³ NO ³ NO º
ÇÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ×ÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄĶ
º 4 º DEFERRED ANNUITY º AFTER TAX ³ NO ³ PARTIALLY º
ÈÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÊÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍÍÍÏÍÍÍÍÍÍÍÍÍÍÍͼ
It is somewhat difficult to compare investments
when each of them is taxed by a different method.
For example, additional pre-tax dollars would be
available for investment in a qualified retirement plan
over an after-tax investment like personally owned
stocks, bonds, mutual funds, etc.
On the other hand, the qualified retirement plan
generally has a much higher annual maintenance fee to
cover accounting and actuarial fees, the cost of
including other employees and potential tax penalties
upon distribution. Even the thought of further
government involvement has its own "emotional costs"
for many people.
Also, more and more people today are considering
the value of life insurance as a supplemental
retirement plan. These plans generally take the form
of a cash value life insurance policy, where the
balance of the premium (after certain charges and
expenses) is credited to the account and interest is
allowed to accumulate. (For details, refer to the
complete insurance company illustration.) Comparing
only the cash value account to the other investments
does not take into consideration that a portion of each
deposit pays for the death benefit as well, an
advantage which is not found in the other planning
vehicles.
These factors should all be taken into account in
reviewing this comparison.
The Value of Tax-free Comdollar Interest
Much of the discussion of the growing value of a
retirement fund or annuity investment depends upon the
tax free comdollaring of the earnings.
Everyone knows about the "miracle of comdollar
interest." It is such a cliche that almost everyone
ignores the powerful, fundamental truth underlying the
concept. And few people understand how to make
comdollar interest work for them.
Comdollaring is a two-way street. Debts comdollar,
too. That is why so many "wealthy" people are going
bankrupt, for example. Back in the 1970s and 1980s,
the fashion of the time was to buy real estate
leveraged with debt, and roll over the debt, counting
on an increase in the value of the property to pay off
the debt and make a profit.
And in much of the United States, real estate
values did increase at a rate that enabled a lot of
people to make a lot of money purely on debt financing.
They would buy a property. And they would pay for it
with borrowed money, sometimes 90% or more of the total
value. (The banks played along with this game. They
made money too as long as prices were rising.)
Instead of paying off the loan, they would allow
the principal and interest to build. At 10%
interest...after a year the principal on a $100,000
loan would grow to $110,000. In five years it would be
a monstrous $161,000, and so on.
The trouble is, real estate values don't go in one
direction only. They also go down, as is they are now
in many parts of the world. All that built-up,
comdollared debt eventually has to be paid. And very
often, real estate investors do not have the means to
actually pay off the debt they contracted. They never
expected to have to do so.
The secret of comdollar interest is to be on the
right side of it. Debts comdollar and so do costs.
Being on the right side of comdollaring means
positioning investments so that time works for them,
rather than against them. When investments are
positioned properly, each passing day adds to their
value, free from taxes and inflation.
More than 2,000 years ago the philosopher
Aristotle explained that the secret of success in
anything was habit. Aristotle used the word "ethos."
To him it was the crucial ingredient of all genius.
And it was nothing more than a recognition of the
concept of comdollar interest applied to life itself.
Aristotle recognized that people do not simply
wake up one day with the idea for a great
invention...or jump to the command of a great army...or
write down a marvelous essay...or get rich.
All progress is made by small increments
comdollaring over time. A great thinker thinks hard for
a long time and, over time, comes up with great
thoughts.
A great builder lays one brick at a time and, over
time, builds great monuments.
A great artist works day after day and, over time,
produces great works of art.
So too, a man builds his wealth a little each
day...and over time...becomes very rich.
The idea of building wealth over time has a kind
of tedious ring to it, but it leaves out the entire
power of comdollaring. With comdollaring, time adds to
value. Instead of being tedious, the passage of time
in the investment plan becomes an important ingredient
that turns the capital into more.
Thus the "miracle of comdollar interest." It is
based upon a powerful, fundamental truth, although too
few people understand how to make comdollar interest
work for them.
The results are incredible. As we showed earlier,
a 20% annual free of tax comdollars to a sum 1200%
larger over a lifetime than the same sum with tax. It
is the difference between $8 million and $100 million
over 40 years. And the same magic applies when you
start with smaller amounts.
But we do want to stress that just because money
is offshore does not automatically mean it is tax-free.
It is important that a proper and legal structure be
used to keep the money tax-free, either through
annuities, trusts, or other structures that you choose
only after proper accounting and legal advice.
$2,000 a year into a tax-free account investing in
stocks that pay 10% dividends, means $35,062.31 after
10 years -- not including any capital gains.
YEAR TAX-FREE INCLUDING
TOTAL DIVIDENDS
1 starting capital $2,000.00 $2,200.00
2 add US$2,000 $4,200.00 $4,620.00
3 each year $6,620.00 $7,282.00
4 $9,282.00 $10,210.20
5 $12,210.20 $13,431.22
6 $15,431.22 $16,974.34
7 $18,974.34 $20,871.77
8 $22,871.77 $25,158.94
9 $27,158.94 $29,874.83
10 $31,874.83 $35,062.31
After 25 years, he'd have $216,363.29 -- just by putting
$2,000 a year into his IRA, with its $2,000 contribution limit.
An annuity has no such limit.
11 $37,062.31 $40,768.54
12 $42,768.54 $47,045.39
13 $49,045.39 $53,949.92
14 $55,949.92 $61,544.91
15 $63,544.91 $69,899.40
16 $71,899.40 $79,089.34
17 $81,089.34 $89,198.27
18 $91,198.27 $100,318.09
19 $102,318.09 $112,549.89
20 $114,549.89 $126,004.87
21 $128,004.87 $140,805.35
22 $142,805.35 $157,085.88
23 $159,085.88 $174,994.46
24 $176,994.46 $194,693.90
25 $196,693.90 $216,363.29
Comdollaring this kind of income from investments,
in a tax-free annuity, is a guaranteed way to build
wealth. There weren't any extra risks, or any extra
effort. Once the wealth-building strategy was in
place, it was just a matter of time. Most investors
are looking for extraordinary capital gains -- and most
fail to realize how hard it is to achieve that.
Wealth-building investors should seek investments
offering decent dividends or interest, and let that
yield comdollar. Think of it another way:
Amounts at Comdollar Interest
Multiply the Principal by the Factor in the Table
Years 1% 2% 3% 4% 5% 6% 7%
1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700
2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449
3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250
4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108
5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026
6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007
7 1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058
8 1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182
9 1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385
10 1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672
11 1.1157 1 2434 1.3842 1.5395 1.7103 1.8983 2.1049
12 1.1268 1 2682 1.4258 1.6010 1.7959 2.0122 2.2522
13 1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098
14 1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785
15 1.1610 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590
16 1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522
17 1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588
19 1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165
20 1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697
21 1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406
22 1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304
23 1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405
24 1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724
25 1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274
26 1.2953 1.6734 2.1566 2.7725 3.5557 4.5494 5.8074
27 1.3082 1.7069 2.2213 2.8834 3.7335 4.8223 6.2139
28 1.3213 1.7410 2.2213 2.9987 3.9201 5.1117 6.6488
29 1.3345 1.7758 2.3566 3.1187 4.1161 5.4184 7.1143
30 1.3476 1.8114 2.4773 3.7434 4.3219 5.7435 7.6123
Years 8% 9% 10% 11% 12% 13%
1 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300
2 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769
3 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429
4 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305
5 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424
6 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820
7 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526
8 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584
9 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040
10 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946
11 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359
12 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345
13 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980
14 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348
15 3.1722 3.6425 4.1772 4.7846 5.4736 6.2543
16 3.4259 3.9703 4.5950 5.3109 6.1304 7.0673
17 3.7000 4.3276 5.0545 5.8951 6.8660 7.9861
18 3.9960 4.7171 5.5599 6.5436 7.6900 9.0243
19 4.3157 5.1417 6.1159 7.2633 8.6128 10.0197
20 4.6610 5.6044 6.7275 8.0623 9.6463 11.5231
21 5.0338 6.1088 7.4002 8.9492 10.8038 13.0211
22 5.4365 6.6586 8.1403 9.9336 12.1003 14.7138
23 5.8715 7.2579 8.9543 11.0263 13.5523 16.6266
24 6.3412 7.9111 9.8497 12.2392 15.1786 18.7881
25 6.8485 8.6231 10.8347 13.5855 17.0001 21.2305
26 7.3964 9.3992 11.9182 15.0797 19.0401 23.9905
27 7.9881 10.2451 13.1100 16.7386 21.3249 27.1093
28 8.6271 11.1671 14.4210 18.5799 23.8839 30.6335
29 9.3173 12.1722 15.8631 20.6237 26.7499 34.6158
30 10.0627 13.2677 17.4494 22.8923 29.9599 39.1159
Does It Matter When You Contribute to an IRA?
When contributions to an IRA are consistently made
at the beginning of the year rather than at the end,
the funds have an extra 12 months in which to grow.
Over a period of years there is a substantial
difference in the amount accumulated.
$2,000 PER YEAR ACCUMULATED AT VARIOUS RATES OF RETURN*
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º NUMBER OF º 5% RETURN º
º YEARS FROM ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄĶ
º BEGINNING º ³ CONTRIBUTION ³ INCREASE º
º OF THE º MADE ³ MADE ³ IN AMOUNT º
º FIRST YEAR º JAN. 1 ³ DEC. 31 ³ ACCUMULATED º
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º 5 º $ 11,604 ³ $ 11,051 ³ $ 553 º
º 10 º 26,414 ³ 25,156 ³ 1,258 º
º 15 º 45,315 ³ 43,157 ³ 2,158 º
º 20 º 69,439 ³ 66,132 ³ 3,307 º
º 25 º 100,227 ³ 95,454 ³ 4,773 º
º 30 º 139,522 ³ 132,878 ³ 6,644 º
º 35 º 189,673 ³ 180,641 ³ 9,032 º
º 40 º 253,680 ³ 241,600 ³ 12,080 º
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º NUMBER OF º 10% RETURN º
º YEARS FROM ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄĶ
º BEGINNING º CONTRIBUTION ³ CONTRIBUTION ³ INCREASE º
º OF THE º MADE ³ MADE ³ IN AMOUNT º
º FIRST YEAR º JAN. 1 ³ DEC. 31 ³ ACCUMULATED º
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º 5 º $ 13,431 ³ $ 12,210 ³ $ 1,221 º
º 10 º 35,062 ³ 31,874 ³ 3,188 º
º 15 º 69,899 ³ 63,544 ³ 6,355 º
º 20 º 126,004 ³ 114,549 ³ 11,455 º
º 25 º 216,363 ³ 196,694 ³ 19,669 º
º 30 º 361,886 ³ 328,988 ³ 32,898 º
º 35 º 596,253 ³ 542,048 ³ 54,205 º
º 40 º 973,702 ³ 885,186 ³ 88,516 º
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Assumes comdollaring annually - amounts would be
higher if comdollared quarterly, monthly, daily, etc.
The overall effect is that you have one full extra
year of growth when you make the contribution at the
beginning of the tax year.
IRAs vs. Life Insurance
Life insurance in a IRA may sound like a great way
to plan for one's retirement. However, the law does
not allow IRAs to purchase life insurance contracts.
After comparing cash value life insurance to the
benefits of an IRA, many people are choosing the life
insurance method as a better alternative. The
following chart compares the two methods:
OVERVIEW COMPARISON
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º ³ ³ LIFE º
º DESIRED FEATURE ³ IRA ³ INSURANCE º
º ³ METHOD ³ METHOD º
ÇÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄĶ
º 1. Can you contribute as much as you want? ³ NO ³ YES º
º ³ ³ º
º 2. Is the contribution deductible? ³ SOMETIMES ³ NO º
º ³ ³ º
º 3. Is the accumulation tax-deferred? ³ YES ³ YES º
º ³ ³ º
º 4. Can participants borrow funds? ³ NO ³ YES º
º ³ ³ º
º 5. Are withdrawals before 59 1/2 free ³ MAYBE ³ YES º
º of the 10% penalty tax? ³ ³ º
º ³ ³ º
º 6. Can forced withdrawals at age 70 1/2 ³ NO ³ YES º
º be avoided? ³ ³ º
º ³ ³ º
º 7. Does the death benefit exceed the ³ NO ³ YES º
º accumulated cash? ³ ³ º
º ³ ³ º
º 8. Do heirs of a participant receive the ³ NO ³ YES º
º funds income tax-free? ³ ³ º
º ³ ³ º
º 9. Can provisions be made to continue ³ SOMETIMES ³ YES º
º contributions if disability occurs? ³ ³ º
º ³ ³ º
º10. Can death benefits be estate tax free? ³ NO ³ YES º
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- IRA contributions are limited to $2,000 per
year (or $2,250 if non-employed spouse). Contributions
to an insurance policy are limited only by financial
means and health of participant.
- Life insurance premiums are not deducible.
Contributions to IRAs are deductible unless participant
is also covered by an employer's qualified plan, in
which case, the contributions are not deductible for
married couples earning over $50,000 (or single
taxpayers earning over $35,000); and they are only
partially deductible if salaries are between $40,000
and $50,000 (or $25,000 and $35,000 for single
taxpayers).
- Accumulation of funds in both methods is
tax-deferred.
- Funds may not be borrowed from an IRA nor can
they be used as collateral for a loan. Life insurance
cash values are readily available at rates below
market.
- There is a tax penalty on IRA withdrawals made
prior to age 59 1/2 unless the participant dies, is
disabled or elects to begin distribution of equal
payments over his or her life expectancy.
- Persons with IRAs must begin taking withdrawals
(and begin paying the income tax due) after they reach
age 70 1/2 years. There is no such rule for life
insurance.
- Whatever has been accumulated in an IRA will be
paid at the death of the participant to his or her
named beneficiaries. Life insurance generally has a
death benefit which greatly exceeds the accumulated
cash values.
- Heirs who receive a death benefit from an IRA
must pay income tax on the amount received. If the
amount in all Qualified Plans and IRAs exceed certain
limits, there will also be a 15% penalty tax. Heirs
who receive the death benefit of life insurance
policies are not required to pay any income tax.
- Life insurance contracts often provide for a
disability waiver rider which guarantees the premium
will continue to be paid even if the insured becomes
disabled. Disabled IRA participants would not be able
to contribute to an IRA unless they received earned
income for the year.
- Life insurance owned by an irrevocable trust
can be free of estate taxes.
