Many financial advisors encourage their saver clients to contribute to their company’s qualified plan, at least enough to receive the company match. Which is hard to argue any differently; that company match is free money so why not cash in if you can? 

And, of course, the “tax breaks” are another bonus. Since the money comes out of your paycheck pre-tax, investing in a qualified plan is bound to make April 15 more tolerable.  Not a bad deal, right? Well … not until you’re ready to retire, that is.

When you are ready to retire that’s when they suddenly become the worst possible retirement plan, from a tax perspective, a saver could have.

Here’s five reasons why:*

  1. Distributions will be taxed at your highest rate.
  2. Risk for double taxation
  3. You have to withdraw money when the IRS says so.
  4. Possibly the worst account to leave to a surviving spouse.
  5. Your account is fully exposed to tax law changes.

(Reference Article)

So, what should your client do:*

If they’re somewhere between Point A (when saving money in a 401(k) plan seems like a great idea) and Point B (when withdrawing money from a 401(k) seems like a bad idea)?

Sit down with your client and discuss what Qualified plans really do and options to move that money to a tax free and/or tax favored account option.  For example, it could be to move it into a specially designed life insurance plan. They will pay a little extra in taxes during the move, but they’ll eliminate the five reasons we discussed.When discussing retirement savings with your clients the fact that qualified plans, like a 401(k), are widely misunderstood is the place where you will want to start your discussion. 

It’s important your clients understand that these plans are NOT tax breaks or tax savings plans; they are tax deferred savings plans with very specific rules and regulations.

*Note: The views expressed in this article are just one opinion.  Please always work with a licensed financial professional when determining a course of action for your investments and retirement savings, and determining your taxes.

About the Circle of Wealth® 
The Circle of Wealth® focuses heavily on communication strategies; and we know if you can communicate with your clients so they truly understand your solutions they will, in turn, be better able to trust your advice.  The Circle of Wealth® has several presentation tools that can help communicate the benefits of a permanent life insurance policy and the fact that it is not all about rate of return.