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Eric Wilson
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Eric Wilson   My Press Releases

The Difference Between Tax Deferred and Tax Free

Published on 11/12/2018
For additional information  Click Here

When I got my first job out of college it was 1991.  I heard about this great retirement vehicle called a 401 (k).  Now, I really did not know what a 401 (k) was, but I was told to ask each company I interviewed with if they had a 401 (k).  So I get my job with a small company in the Washington, DC area called Spirit Rent-A-Car, and they had a 401(k).  They did not pay a very high salary, but they had a 401 (k) so I took the job.

As time went on I learned the value of a 401 (k).  First they were matching up my portion up to a certain percent.  It has been a long time since I worked there so I do not know the exact amount.  For this discussion we will use 4%.  FREE MONEY!, my favorite kind.  Yeah!  Then I find the real power was that you do not pay taxes on that income until you take the money, when you retire, so if you are not working you should be in a lower tax bracket.  Wow, what a concept.

But then I found out that 401 (k) are investments in the market I was good with that, I like the market at age 22.  Then, sadly I found out that 401 (k)’s can and do lose money.  Well that kind of sucks, no one told me that when I signed up.  Then the talked about the power of tax deferral and interest compounding, well that sounds great.  And that still is a great benefit, but what our country is how much in debt??  Almost $17 trillion, well how did that happen?  Why can’t I just go print my own money and call it a loan.  I have a color copier, maybe I can print my own money.  Well back to being serious.  It poses the question.. In the future will taxes go up or down?  It seems like they have to go up.  How else can the government pay off a debt that high??

If I am going to be in a higher tax bracket, does it make sense to have a tax free account or a tax deferred account?  It kind of depends on your age and your strategic plan, but you can get a totally tax free retirement and get the power of interest compounding over time, if you play the game by the right rules.

Believe it or not there are some vehicles you can put yourself into and retire with a tax free income.  The Roth IRA is one example, since you are putting money in after taxes.  Another way is with life insurance, WHAT DID YOU JUST SAY.. LIFE INSURANCE??  Yes, believe it or not you can use the IRS code of 7702(a) to build cash value in a life insurance policy and all of the loans are tax free.  And you get a death benefit, which you do not get with a Roth IRA, some life policies have living benefits, which gives you access to part of the death benefit while you are still alive.  Now here is the next best part, an Indexed Universal Life, your principal is guaranteed, so not only to you get the tax free income, you never lose money.  What a concept.

 

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