Is Your Retirement Plan Actually COSTING You Years Of Retirement?

What you need to know about taxes and retirement!

Retirement plan tax savings is one of the main pillars of a tax savings plan. 

A tax savings plan has five pillars and retirement planning is one of those pillars. When it comes to retirement planning for taxes there are three ways to invest your money. We’re not going to talk about certain stocks. We’re not going to talk about mutual funds or annuities. We are going to talk about three ways to invest your money from a tax perspective.

The 3 ways to invest your money…

What those are is tax today or sometimes called tax always. There is tax tomorrow or sometimes called tax later.  Lastly, there is tax never. You would think tax never is the best out there, right? It’s not quite truly tax never, but it’s as close to tax never as you can get. I’m going to give you an analogy to go through each of these investment vehicles.

The Farmer (You) and his seed…

Tax today or tax always. Imagine a farmer going out into his field to plant some seed. He has a big bag of seed and Uncle Sam pulls up and says, “Hey, you need to pay the tax on that seed. I’m going to take some of your seed, depending on what your tax rate is. Maybe 25%; maybe 30%; maybe 40% of your seed. Now you go plant the rest.  But remember, when you harvest all that seed, I’m going to come back and tax part of your harvest the same rate I just taxed you now.” That percentage is your marginal tax rate.

That’s what tax today and tax always represent.  You are probably thinking, “Gosh, why would I even do that?” That’s how it happens. So, what are those strategies? Tax always, if you have a normal savings account, you put after tax dollars into it. Whatever little bit of interest you earn; Uncle Sam comes and takes his unfair share. . . his piece of the harvest. If you have a regular brokerage account, those are tax always accounts as well.

Let’s talk about tax tomorrow or tax later. The same farmer goes out with his big bag of seed and is ready to plant. Uncle Sam pulls up and says, “Oh, Mr. Farmer, you know what I’m going to do?  I’m going to let you keep all of that seed. I’m not going to tax it. I’m going to give you a tax break. Go plant all of that seed but when you harvest that seed I’m going to come back and tax your entire harvest.” That’s your tax later or tax tomorrow strategy. This category includes; traditional IRAs, simple plans, 401k plans, solo 401k plans, pension plans and SEP IRAs.  It would also include Defined Benefit plans, annuities, and real estate. All of these are tax later.

Why is Real Estate, Tax Later?

A lot of people say, “Well, why is real estate tax later?”

When you buy real estate you get a tax break for it now. Because you depreciate the real estate you can actually have positive cash flow from the real estate, but not pay any taxes on it. Sooner or later, though, that depreciation gets used up. So, when you sell it, or later on when you’re still making money off of it; the tax benefits aren’t there. So, it’s a tax later investment.

Fun With Math…Really?

Let’s go through and have some fun with math. This scenario is actually based on a perspective client that came into my office recently.  Jack’s CPA had just passed away and had built up a large amount of money into a SEP IRA. Jack had worked really, really hard over his lifetime. He was ready to retire and wanted to know what the future would look like. These numbers are based on Jack’s scenario. Let’s say you contribute $50,000 dollars a year to your SEP IRA. You do this for 25 years. You’re earning 7% average annual return.

My question to you is this: How much do you have for retirement?


Wow!  That’s a nice chunk of change.  The biggest question is: How long will it last? Let’s assume you earn 7% annually throughout your retirement.  Let’s also assume you want $200,000 a year to live on.  That is exactly what Jack said he needed. But really the question is, if you want $200,000 dollars a year to live on, how much do you actually need to withdraw annually?

The answer is $300,000 dollars per year based on that tax rate. Now my question to you is: How long is the money going to last?

14.9 years. That’s it. Only 179 months.

The “Tax Man” taketh away…

That’s a completely different retirement plan than you probably planned for. That $3,000,000 is going to last you just less than 15 years. Why is that? Taxes. It’s all because of taxes! Uncle Sam gave you that tax break up front and said, “Hey, just go plant your seed.” But when you go harvest that $3,000,000 Uncle Sam is there to take his share every single time. Taxes have a huge effect on your retirement.

The Farmer Saga Continues…

Let’s go to this tax never vehicle.  What does that look like? With the tax never strategy the farmer goes out and says, “Hey, I’ve got my big bag of seed, and I’m ready to plant.” Uncle Sam pulls up and says, “Mr. Farmer, I’m going to tax a little bit of your seed right now.  But whatever your seed grows into from now until forever, and ever and ever is yours to keep for free.  I’ll never tax it again” The farmer smiles and says, “Okay.” Uncle Sam takes his portion of the seed and the farmer goes out to plant his field and says, “Now at least whatever I turn my seed into; whatever my harvest is, is mine to keep. I’m free from tax!”

Back To The Real World…

How do we do this in the real world? A ROTH IRA is one of those tax never strategies. Some of you might be saying, “Well, I can’t invest in a ROTH IRA. I make too much money.” There is a back door strategy to get some money into a ROTH IRA, as well. Here it is:  You can contribute to a traditional IRA and then do a rollover every year into a ROTH IRA. It doesn’t matter on how much money you make.  There’s also a ROTH 401k. That would fall in this tax never category, as well.

BUT, There Is Even A BETTER Way

The 7702 plan!  The thing about a 7702 plan is there’s no income limitation. On the ROTH, you can only put so much in.

There is NO contribution limit in the 7702 plan. There is a contribution limit in ROTH IRAs. 7702 plans grow tax free. You get tax free withdrawals. You never pay tax on that harvest. There’s no age restrictions.  You can pull it out before you’re 59 1/2.  ROTH IRAs you need to wait until you’re 59 1/2.  You have easy access to your funds even prior to retirement. If you die prior to your funds all being used up by you, you get a tax free distribution on death. In a SEP IRA or any of those other plans, there’s actually tax consequences to your family when you pass away.

This sounds to good to be true…

Let’s talk about this tax never vehicle and have a little fun with math.  A properly structured 7702 plan…

I’ve been helping people save taxes for about 25 years. I’ve only found a couple of guys who really know how to properly structure these plans. That’s why I say ‘properly structured’.  It has to be done right.

We contribute $35,000 dollars a year to our 7702 plan. Now, you might be saying, “Why aren’t we contributing $50,000? That’s what we did with the SEP IRA.” The reason is Uncle Sam shows up and takes part of our seed so we only have $35,000 to put in; we don’t have the $50,000.

We’re going to contribute $35,000 a year and just like in the SEP scenario we’re going to do this for 25 years. We’re going to make 7% average annual return just like in the previous example. The question comes down to: How much do you have for retirement? You’ve done this for 25 years. How much have you accumulated?


Now, you’re thinking, “Wow! That’s a lot of money.” But it’s not as much as in the SEP IRA.

How can this be better?

The SEP IRA had almost a million dollars more than that. The big question is: How long will it last?  How much do you need to withdraw out of your 7702 every single year if you still want to net the same $200,000 a year we’ve been talking about?

You only have to pull out $200,000 a year because it’s tax free.  We don’t have to pay any more tax on it.  It’s totally tax free.  So, now how long will the money last?  Because of the way a 7702 plan is structured, because you don’t have to pay any tax on the withdrawals; your money’s going to last for 493 months.

Wow!  Over 41 years!  Let’s look at that for a second.  $8,200,000 is what’s coming out of your 7702 plan if it’s properly structured.  Let’s look at the tax effect of the taxes of the SEP IRA.  The total tax “savings” was $375,000 ($15,000 a year for 25 years).  Is that really a tax savings?  NO!

But, that’s what most advisors say. That’s what most tax preparers will say, “If you put this much money into your SEP IRA, it’s going to save you $15,000.  We should do that because you’re saving money on taxes.”  Are you really?  What was the total tax cost? It actually cost you almost $1,500,000. A $100,000 a year for 14.9 years as long as your money lasted.

Let’s look at the 7702 plan that’s properly structured. The total tax cost was $375,000. We actually had to pay Uncle Sam $15,000 dollars every year. That’s why we only had $35,000 to put in and not our $50,000 to put in. We did that for 25 years. $375,000.

What was our tax savings?

Our tax savings was 41 years of tax free retirement at $200,000 a year.  Right?  So, what did we actually save?

15 years of retirement and out of money OR 41 years of retirement and, quite frankly, we still have money to go after that.

Which would you rather have?

The BIG Difference…

That’s the difference between planning your taxes for one year versus planning your taxes for your lifetime.  What do you actually want to achieve?  What retirement plan do you want?  It’s easy for a tax preparer or an advisor to say, “Let’s put some money here and it will save you taxes this year.”  What’s it really costing you?  How many years of retirement is it costing you?  That’s the big question.

Do you want that difference in your planning?

We offer a difference like that.  This plan might not work for you. This might not be what you want. Your tax strategies, whether they’re retirement strategies or current year income strategies or business tax strategies, have to achieve your long-term goals.

So, do you want that difference in your planning?

If you do, call or text our office.  You can text this number or you can call this number: 760-932-4943. That’s 760-932-4943. Let’s have a conversation. Either via text or on a call and let’s figure out what your long-term goals are.  Are you actually costing yourself taxes?  Are you actually saving taxes?  How are you going to get to your end goals and dreams and have a tax strategy in place that works for you?

Give us a call when you can. We’d love to help you out.

Have an awesome day.


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