Look Outside The Box For Retirement Distributions
06/01/2006 04:44PM ● Published by Anonymous
Now, this is a laudable goal until I ask them where they are putting their funds to accomplish this early retirement goal? Most of their responses say they will max out their 401k, or fund IRAs and TSAs. So I ask them: why are they putting their money into instruments that will not allow early retirement without penalties?
The answer lies, in part, at the feet of the media “talking heads” who tell everybody to max-fund their qualified plans. These plans have penalties for retiring before age 59 1/2, and are fully taxed when withdrawn as ordinary income (the highest form of income taxation) no matter how they are invested. Many of these plans are employer sponsored and have vesting schedules that keep a percent of your account value should leave early (voluntarily or not).
Another problem with retiring early is that Social Security does not allow for distributions prior to age 62, and then they are at a reduced rate. So, you must plan to make up for the lack of Social Security income for as long as 12 years. And can we really rely on the government to make good on the payments when the 76 million “baby boomers” retire? I think Uncle Sam will have to delay or eliminate early distributions.
So, if you can’t rely on your employer, your IRA, or the government what do you do? Well, start thinking out of the box and look for alternate means that do not have restrictions for early retirement withdraws. You might say Roth IRAs and you would be wrong. Roths won’t do the job because they restrict the amount of funds you can put aside each year, and are not available at all for upper middle-income earners. And many people are not aware that withdraws prior to age 59 1/2, though tax-free, still incur a 10 percent IRS penalty.
So what’s a guy (or gal) to do? Earn your money and pay current tax on it, but put it where it has more favorable taxation in the future, has no limits on the amount you wish to save annually. And most of all will have no restrictions for early retirement withdraws. What pray-tell would allow for all of the above, and more? Find a financial advisor who is familiar with DEFRA and TAMRA revenue acts as they pertain to certain forms of insurance products. You will be amazed at the flexibility and tax advantages available within these revenue acts. There is the potential for lifetime income with taxfree access to funds and protection from creditor and lawsuit action against your nest egg. But, you must find a planner who knows the nuances of these products and revenue acts. Most will not be aware of the potential, but a few can guide you to these “safe harbors.”
Warren L. Hahn an associate with CLC Financial Services Group, is an estate, insurance, and retirement planning advisor with 20+ years of experience. He can be reached at firstname.lastname@example.org.