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Qualified Plans: Know The Rules Before You Play


Hi everybody. Welcome to this edition of 5-Minute Finances. My name is Kyle Davis with Integrity Financial Group. We are an independent financial planning firm in Orlando, Florida. Today we’re going to discuss qualified retirement plans and some of the misconceptions that a lot of Americans have about these plans. Examples of qualified retirement plans are IRA’s, 401(k)’s, Simple IRA’s, and 403(b) plans, to name a few.


What is a qualified plan? A qualified plan is a savings and investment account that meets the requirements set forth by the IRS which “qualifies” it to receive certain tax benefits. Do people pay more taxes than they have to? The easy answer is yes, most people pay more taxes than they would like and would prefer to avoid taxes whenever possible, preferably today. One of the most popular pieces of advice is to put your money into a qualified retirement plan to grow for the future. Ok, now that you know what a qualified plan is, I want to ask you this. What do qualified plans do? First, they defer taxes. You get a tax deduction on the money that you contribute each year. Sounds pretty good, right? I want to talk about something else that qualified plans do that may surprise you. They also defer the tax calculation, defer being a fancy way of saying “postpone”. They are tax postponement accounts… let that roll around in your head for a moment… The IRS isn’t saying that you don’t have to pay the tax…they are simply saying that you can pay the tax later…but at what bracket? Because we don’t know the future of your income or taxes, it is impossible to someone to tell you that you will “save” on taxes by contributing to a qualified plan, such as a 401(k)…in fact if your tax bracket rises, you won’t save on taxes at all…quite the contrary…you will owe additional taxes. Your tax bracket, as you can see, is a big part of this discussion. Most people focus on the tax bracket that they are in today, and NOT the bracket that they will be in when they take the money. Which tax bracket will you be in when you take the money out?


Another problem is liquidity, and this is the big one for me. What happens if you get into a bind and need to access the money in your qualified plan for an emergency or a big purchase? Not only will you be forced to pay the taxes when you take it out, but if you’re under age 59 and 1/2, you’ll also pay a 10% penalty on the money. The key to understand here, is when you have money in a qualified plan during your working years, that money is locked up. You do not have liquidity, use, and control of those funds. Instead, there are tax consequences and penalties. Having those dollars locked away could force you to pay expensive finance charges or go into debt that you could have avoided.


I’m not saying that qualified plans are bad, but you MUST know the rules before you jump in. Also, what’s your strategy for taking the money? Do you have to pay all of the tax? If there were an opportunity to avoid paying some of the taxes that you’ve deferred, would you want to know about that? I hope this video has been thought provoking, and has helped you get a better grip on qualified plans and how they really work.


If you have any questions about qualified plans or if you’d like to speak personally, call or visit us online at www.financialservicesamerica.com. Please subscribe to our YouTube Channel and check out this article on video as well as many others!

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