Much More To Retirement Plans Than Retirement

Mark Wyssbrod

 

 

Many taxpayers try to reduce their taxes anyway they can or are highly motivated by tax deductions. One lure taxpayers are tempted by and reward for participating are retirement plans.

Sure a great reason to save in a retirement plan is to build your golden nest egg. However, some taxpayers only participate for the tax deduction or tax benefits. Retirement plans have many more aspects hidden in their treasure chest.

First, taxpayers can to save for retirement in multiples ways, but they should only do so if it is one of their goals. Taxpayers can save for retirement by saving in an official retirement plan, a regular savings account, other assets, reducing debts...

Official retirement plans primarily consist of individual retirement accounts (Traditional IRA, Roth IRA, SIMPLE IRA, SEP IRA) and employer sponsored plans (401(k), 403(b), pension plans). These types of accounts receive tax benefits, but generally speaking, if you withdraw the monies before 59 ½ you are penalized.

To look outside the box, taxpayers can also save in a variety of other ways including regular savings account and CDs; purchasing stocks, bonds and mutual funds in regular investment accounts; purchasing rental property; reducing debts (mortgages, credit cards, car loans, student loans, etc.). However, these types of accounts lack some of the very important aspects of the "official" retirement plans.

For the rest of the articles we will focus on the aspects of the "official" retirement plans.

Second, potentially the most important aspect of the "official" retirement plans is asset protection. The first one million dollars (accumulative) for each taxpayer is a protected asset. This aspect is important since debtors (secured and unsecured) cannot be awarded these funds (court cases, bankruptcy, etc.). The average taxpayer cannot afford to set up trust or other asset protection vehicles easily or affordably. A taxpayer may be more motivated to save in a retirement account for the asset protection characteristics ahead of their goals or tax benefits.

Third, many small businesses believe they are going to sale their business and use the proceeds for retirement. Small business owners, as many individuals, can over value their assets. Additionally, small businesses do not always succeed. Even franchises can go bad. For instance, if you are ready to sale your business, but the economy slips into a recession or the franchisor end up being in the news for unethical practices or the business is brought into a law suit. These examples are not always predictable, but by planning the business owner can minimize unexpected circumstances. Thus the sale price of the business may be less than what the owner is expecting.

Fourth, savings allows for the diversification of risk. Most small businesses are riskier than mutual funds or savings accounts. A retirement plan can offer the small business over asset protection and diversification of risk through purchasing multiple assets (reducing the owners net worth being dependent on the business's success).

Finally, retirement plans offer an array of tax benefits. For example, a 401(k) allows a taxpayer to receive a tax deduction in the year the monies are placed into the retirement plan, then the monies grow tax deferred, but when you take the monies out they are taxable. Roth IRA, as an example, a taxpayer receives no current year benefit, but the funds grow tax deferred and when a taxpayer reaches the age of 59 ½ all of the monies are tax free.

In conclusion, there are many more aspects to savings for retirement than just for the tax deduction. The asset protection retirement plans offer might be the most value aspect which is usually overlooked. Selecting the right retirement plan and strategy is complicated and it is advisable to discuss with your tax advisor and financial planner.

US Internal Revenue Code Article Source: http://EzineArticles.com/?expert=Mark_Wyssbrod