Brian Michaud
The Michaud Letter Traditional Retirement Accounts
What IF… what you thought you knew about money, turned out NOT to be true? When would you want to know?
The purpose of this conversation is to go through conventional (traditional) financial strategies and QUESTION the actual implications those strategies will have on your financial future.
Because each client’s specific situation is unique, I will provide a 100,000 foot overview, when covering a couple topics.
I encourage you to grab a pen or highlighter and highlight parts of this booklet that pique your interest. When you are finished contact me to schedule a time to meet and review what you’ve highlighted. You may have MANY “AHA Moments” when you read this book (and that’s a good thing). I encourage you to write them down so you can reference them when we meet.
Brian Michaud
CEO and Founder of Encompass
Traditional Retirement Accounts
401(k), 403(b), 457, etc retirement plans. These are employer sponsored plans, also known as a Qualified Retirement Plan. This is how these plans work:
You make a decision as to how much (with limitations) you’d like to have deducted from your paycheck. That amount will grow in an account that you will use for your retirement. The employer may (or may not) contribute into your account also (FREE MONEY). The money that is deducted from your pay is taken BEFORE payroll taxes. And after all payroll taxes have been deducted, plus your retirement contribution, you get the rest to spend.
Sounds like a good thing. After all, this is what I was taught to share with people when I first got into this industry. This is what we were told to do when we entered the work force. This is the same advice that the radio/television entertainers tell people to do to save for their retirement.
Traditional Retirement Accounts
Myth # 1: Putting my money in a qualified account (like an IRA or a 401(k)) saves me from paying taxes.
I’d like to review a few things on how these Retirement Plans (can) affect you:
Q: Once you start accumulating money in these accounts, do you have access to them?
A: Yes (sort of…). You can access the monies but there are a few strings attached:
If you are under the age of 59 ½, you are penalized.
You ‘may’ be able to take a loan against this account, but only if the employer allows it in their plan documents.
If you ‘take’ the money, you will pay taxes on the distribution (PLUS pay the penalty if you are under age 59 ½)
You cannot use these monies as collateral.
You are FORCED to take the monies out, as an R.M.D. (Required Minimum Distribution) when you reach the age of 72.
Q: What will these plans be like when I retire?
A: You will have an amount of money for you to live on, when you retire. However, keep in mind that when you go to have distributions taken from those accounts, you will have to pay taxes on those distributions. Meaning: You will have to put the amount you have distributed, on a tax return.
Let’s look at Traditional Retirement Accounts a little closer
Say you agree with me on the 3 questions I asked earlier. You believe that income taxes will be going up. Fast forward to your retirement. When you go to pull money from your Qualified Retirement Plan, you will (potentially) be paying MORE taxes on those monies, than if you paid the tax when you initially earned it. Let that sink in.
While most people look forward to retirement being debt-free, most are unknowingly building an account they cannot calculate (with certainty) the real amount of debt owed – taxes.
Tax qualified accounts do three things; (while most are only aware of the first.)
They postpone the payment of the actual tax owed.
They postpone the calculation of the actual tax owed.
The government also participates in the earnings (that are taxed).
For my business owners, an IRA, SEP, etc. work the EXACT same way.
Depending on your residence alone, you could be paid 5th or 6th when you receive your first retirement check.
You need to know that your level of success in retirement is directly impacted by the state in which you live, maybe even by the city in which you live.
For the unlucky successful retiree, there may be five/six government tax collectors standing in line ahead of you, ready to take your money.
- The first collector wants Federal Income Tax
- The second collector wants State Income Tax
- The third collector wants a municipal tax
- The fourth collector wants some of your Social Security benefits back because a portion becomes subject to Federal Income Tax.
- The fifth collector wants an additional monthly Medicare premium because of where your total income lands on the governments’ scale.