1.) TAX TRAP: When you fund a "Tax DEFERRED" plan, you are funding the GOVERNMENT's retirement.
HOW?
By funding "Tax DEFERRED" plans you are merely deferring the inevitable TAX consequence. What this means is that when you take your retirement withdrawal/distribution you are paying tax on 100% of that distribution!
"But wait a minute, some of that money is my contribution."
Guess what, IRS does not care. Remember when you took that anorexic tax deduction of $2,000 (more under today's rules) each year? You already took your deduction for "return of principal" exclusion. "No more soup (deduction) for you!"
2.) DISTRIBUTION TRAP: When you first started contributing to your (Uncle Sam's) retirement where you sold a bill of goods something to the effect that "take your deduction today because tax rates will be lower by the time you retire."
Guess what. Unless you retired during the Jimmy Carter years, RATES will hit the roof soon!
So now you will pay INCOME TAX at ORDINARY TAX RATES, on 100% of your distribution, which could be as high as 39.6% starting next year and potentially greater after that.
WHY?
Because of the sunset of the previous tax rate TAX CODE.
3.) VOLATILITY TRAP: Were you a member of the "LOSERS" club when retirement accounts lost an average of 52% of their value in 2008/09?
Still looking to renew your membership dues?
4.) ACCESS TRAP: Did you need to access YOUR MONEY in your retirement plan bfore you retired and were greeted by UNCLE SAM handing you a 10% PENALTY, on April 15, for touching YOUR MONEY?
This is what I call the "ACCESS TRAP." It is affectionately called that because if you want access to the club, you have to pay a cover charge.
5.) DEATH TRAP: Uncle Sam LOVES IRA and 401(k) owners!!!
WHY?
Because many accumulaters of IRA wealth do not spend their accounts before they die. Guess what happens? If you live in Colorado, before your heirs get a nickel, IRS and the State of Colorado will get their checks totaling almost 50%!
So the plan of giving your children and/or grandchildren that $500,000 has been degraded to almost $250,000 and if you have multiple siblings, they'll fight for crumbs. Was that in your Legacy plan?
If the market is going to take your money and Uncle Sam is champing at the bit to get its fair share, why do you still want to ante to be in that game?
The author of this post is knowledgeable of the Estate Tax Code and can help you leave the ranks of so many people that continue to play in these traps. If you are a golfer, you probably try to avoid the "traps" as much as you can. Why not contact a professional that can help you steer clear? It is not to late to cancel your membership in the IRS club!
