IRA and 401k 2018-10-09T13:57:37+00:00

IRA and 401k

With a traditional IRA, your contributions are made pre-tax and can be matched by your employer up to the current allowed maximum amount. If you are over 50, you can contribute an additional amount each year as a sort of “catch-up” for previous years. When you retire and start drawing money out of your IRA, you pay taxes on the income.

Now here’s the rub…

  • The value of your IRA is dependent upon the stock market. Someone else is gambling with your money! If you are like most Americans, you saw the value of your IRA dwindle through the last market meltdown.
  • Your money is pre-tax now, but taxed when you take it out. If you are saving income tax of 15% on $100.00 today ($15.00) and let’s safely assume that (a) income tax rates will go up by the time you retire and (b) the value of a dollar will be less than it is today due to inflation, then even if you are paying the same 15% income tax in the future and accounting for a 5% interest rate each year and a 5.3% inflation rate annually (the average inflation rate per year for the last 40 years) your net gain is -27%.
  • If you need to take the money out of your IRA before age 59 1/2, you have to pay a 10% penalty. Plus, you pay income tax on the distribution!
  • Worse yet, if you do not start taking money out of your IRA by age 70 1/2, you pay a 50% penalty tax on the money you should have been taking out! In other words, you are forced to quit saving and start spending, even if you don’t want to!

The Roth IRA is a little different and more tax friendly in that your contributions are after-tax but they are still limited like a traditional IRA. You still pay a 10% penalty for early withdrawal, but there is no penalty if you wait to take out your distributions after age 70 1/2 and all income is not taxable. The main drawbacks of the Roth IRA are:

  • You are limited to only the current maximum allowed per year and there is no employer matching
  • You have to be employed (ie earning income) in order to contribute
  • If you make too much money you can’t contribute to a Roth IRA

How does the Infinite Banking Concept compare?

  • The money you pay into your IBC system is after-tax, however you are not limited to a maximum dollar amount per year. In fact, you can create multiple IBC systems!
  • Withdrawals from your IBC privatized bank are not considered income and are tax-free. You can borrow only certain amounts from your IRA (for example $10,000 maximum to put down on a house) and you must pay it back within 5 years and pay taxes on the withdrawal!
  • The value of your IBC system is not controlled by the stock market.
  • Your IBC system can become self-funding after the initial capitalization phase – Your yearly dividends can be put right back into your system and the interest paid compounds year after year putting your privatized bank’s cash value on steroids!
  • The cash accrued in your IBC system passes to your beneficiaries tax-free!
  • Pass it down to your children – You can assign ownership of your IBC system to someone else and teach your children how to grow and protect their wealth from an early age!

The 401k is the investment vehicle of choice for most large corporations and although the term “401k” is thrown around quite a lot and easily recognizable, the average worker has no idea really what it is or how it works. Most of us just think that as long as we and our employer are putting money into it we’ll have what we need to retire!

First of all, 401k’s are investment vehicles, not savings vehicles. Savings vehicles minimize risk to insure capital preservation, while investments involve high risk where you can lose everything. Let’s take a look below at the 401k system as it compares to the Infinite Banking Concept.

401k…

A 401k is what is called a defined contribution plan. That is, you are limited to how much can be contributed each year. If you are age 50 or older you can contribute an additional sum per year as a “catch-up.” Consult current year’s “Tax Facts” online for the most up to date information. Your contributions are pre-tax, which means you’ll pay taxes on the gains when you receive your distributions. In other words, the government is willing to forego taxes now since the tax-rate will be higher when you decide to take it out and they’ll get more money, (kind of sounds like taking out a loan and paying back interest, doesn’t it?)

In most cases, you have a “vesting” period with your employer of 5 years or more. That means you have to stay at that employer for at least 5 years and contribute to your 401k. You can “rollover” your plan into another qualified plan (such as an IRA) within 60 days without tax consequences if you decide to cash out your plan. If you do not roll it over, you pay taxes on the gains.

Your employer has the option (if they can afford the administrative costs) to allow you access to your own funds in the form of a loan, but many employers allow only for the following reasons:

  • to pay education expenses for yourself or your child
  • to prevent eviction from your home
  • to pay unreimbursed medical expenses
  • to purchase a first time residence

These loans must be paid back within 5 years and in some cases may be extended if used toward purchasing a residence. This money is also subject to the 10% early withdrawal penalty. Isn’t it nice that an employer in many cases can dictate how you access your own money?

Now here’s the rub…
• If you decide to take money out before age 59 1/2, it is subject to a 10% early withdrawal fee.
• If you decide to take a lump sum payout, you are subject to a 20% withholding tax for taxes! (There are certain exceptions such as the direct rollover described above.)
• As with a traditional IRA, the “savings” you get with pre-tax income work against you in that you do not have the capital to invest in better vehicles today that offer better long-term returns (such as the Infinite Banking Concept) and the taxes you pay at a later date will more than eat up any “savings.”
• Just as with the Traditional IRA, if you do not start taking money out of your plan by age 70 1/2, you pay a 50% penalty tax on the money you should have been taking out!

Your 401k’s value is controlled by the stock market and someone else’s decisions on how to manage your money! If you are like most Americans with a 401k, after the last stock market meltdown you are probably left with a 201k! (If that doesn’t scare you, just think of the poor souls who worked at Enron, Tyco, Worldcom, etc. who saw their 401k’s go from two- or three-hundred thousand all the way down to zero!)

For Example…

Let’s say you are 40 years old and would like to retire when you turn 65. You make a decent salary, let’s say $50,000 per year, and you participate in your employer’s 401k and contribute $5,000 each year for the next 25 years. Your employer matches your contributions for a total of $10,000 per year.

At an average rate of return of 5%, you would have a little over $500,000 in your account at retirement. However, remember you are now taxed on the income (and your rate of return typically will not be consistent because your fund is based on the stock market which has had an average return of only 3% in the last 20 years.)

So now you are 65 and decide to retire and start withdrawing a yearly payout. Your yearly payout is only $33,000 per year! AND, now you have to pay taxes! Even if you are in the 15% tax bracket, that’s over $5,000 per year in taxes, leaving you with a net income of only $28,000 per year! You were making $50,000 during your working years, and now you will be making roughly half that. That salary amount does not go too far today…imagine how far it will go 25 years from now!

You would have to put $20,000 per year (nearly half your salary) in order to receive the same salary when you retire as you have today. However, at a yearly inflation rate of 5.3% (the average inflation rate of the last 40 years), you would need to have $181,835.75 per year when you retire in order to enjoy the same lifestyle that $50,000 today affords you.

How does the Infinite Banking Concept Compare?

  • The money you pay in to your Infinite Banking Concept system is after-tax, however you are not limited to any amount per year. In fact, you can create multiple IBC systems of any amount subject to financial underwriting.
  • Withdrawals from your privatized bank are not considered income and are tax-free. You can borrow only certain amounts from your 401k (for example $10,000 maximum to put down on a house) and you must pay it back within 5 years and pay taxes on the withdrawal!
  • The value of your IBC system is not controlled by the stock market.
  • Your IBC system can become self-funding after the initial capitalization phase – Your yearly dividends can be put right back into your system and the interest paid compounds year after year putting your privatized bank’s cash value on steroids!
  • The cash accrued in your IBC system passes to your beneficiaries tax-free!
  • Pass it down to your children – You can assign ownership of your IBC system to someone else and teach your children how to grow and protect their wealth from an early age!

If you have ever bought or sold stocks (or even thought about it) then you are well aware that it is basically gambling with your money, especially in the last several years. Sure, the reward can be high (high risk usually equals high rewards…but not always), but just like gambling, the odds are in favor of the house, and just one big loss is all it takes to wipe out your gains.

Stock Market…

Even if you invest in “stable” stocks, there are no guarantees. As the market activity of 2008 – 2010 has shown, stock values can fluctuate wildly at the drop of a hat. It is a game, and one that is not easy to win. If it were easy, everyone would be rich!

Why is the stock market such a gamble? Because it’s motivated by two basic human emotions: fear and greed.

Ask any stock trading professional and they’ll tell you. Their number one goal is to mitigate the inevitable losses. No doubt you’ve seen the late-night infomercials offering systems that take the risk out of trading and offer huge returns. The only guarantee is that the company creating these programs has your money!

When trading stocks you have three basic options:

  • Trust your broker (someone else in charge of your money)
  • Spend lots of time and money becoming “educated” about the stock market, then constantly monitor your stocks trying to buy and sell at the right time to either make gains or mitigate losses
  • Just jump in and get a VERY expensive education!

The truth is, most of us don’t have the time or resources to constantly do research or monitor the market…we have lives to lead! Even if we become experts, we are still gambling with our money and can easily lose it all in one fell swoop.

Why is this?

Did you know that when you buy “stocks” you are buying “used” stocks? That’s why they are called “exchanges.” You see, the company gets the money only during their Initial Public Offering (IPO). People buy the stocks and the company raises capital. After that point, the stocks can be traded or exchanged, but the company does not see that money. You are purchasing someone else’s ownership rights to that stock. If the company does well, do you see immediate money in your pocket? Not really, but hopefully your stock is worth more, and you can find someone who wants to buy it. But if the company does badly , then your “stock” is worth less. Fear and greed…rise and fall…such is the way of the stock market.

In contrast, the Infinite Banking Concept takes a slow, steady approach to wealth creation. If you average out your gains over the course of your trading career, you will most likely find that your actual rate of return on your investment is dismal at best. Even if you have seen tremendous gains, you have also seen even worse losses. The average return for the equities markets in the last 20 years is only 3%.

The Myth of the “Average” Rate of Return

Have you heard someone say “The average rate of return on this fund is 10%”? This term is very misleading.

For Example…

If you”invest” (gamble) $100 in a mutual fund and that amount grows to $150 the first year, then the next year falls back to $100, you’ve received a 25% average rate of return (50% / 2 years) even though you have the same amount of money as when you started!

True, there are those who have made a lot of money in the stock market, but they are few and far between. Again, if it were that easy, everyone would be rich! Those who are wanting to get rick quick and desire instant gratification often find their situation no better off than when they started. You can save up for years to have enough money to significantly invest in the stock market and make actual gains, only to lose it all instantly. Plus your money is constantly tied up and the value can fluctuate wildly. Any money you decide to cash in is subject to capital gains taxes.

The Infinite Banking Concept, on the other hand, not only teaches you the value of money management but also:

  • allows you to use your money when you need it tax free.
  • grows at a guaranteed rate each year.
  • is not controlled by the stock market (fear and greed of others.)
  • can become self-funding after the initial capitalization phase
  • allows you to pass the cash value to your beneficiaries tax-free!

The importance of working capital for both small and large businesses alike cannot be overstated. From petty cash to equipment financing to payroll, money is constantly flowing through the business. When a business owner employs the benefits of The Infinite Banking Concept, their dependence upon financial institutions for working capital instantly declines. Over time, the business can generate 100% of its financing needs from its own private banking system. Plus, there’s an added bonus: The IRS allows the interest to be deducted on legitimate business loans, which you can finance from your own IBC bank!

You can use your bank for solutions such as:

  • Large Equipment for your Business
  • Business Supplies
  • Employee Retirement Plan
  • Finance Payroll
  • Employee Health & Wellness Plan
  • Company Retreats/Business Meetings
  • Marketing Events like Season Tickets for Sports Team
  • Corporate Vehicles
  • Factoring for other businesses
  • Your lease/building space
  • Corporate Housing
  • Travel Expenses
  • Business Loans
  • Add Fringe Benefits to Attract Key Personnel
  • Business Acquisitions & Mergers
  • Produce a Tax-Free Stream of Income at Retirement
  • Mitigate the need for a brick and mortar commercial bank other than for a checking account and for smaller needs
  • Because of the new sweeping financial Dodd/Frank Bill, you no longer have the protection of the FDIC as it once was. The Dodd/Frank Bill has legislated “bail-ins” rather than “bail-outs”. Check out the Dodd/Frank Bill information on the Internet. It has changed your life and you don’t even know it.

Have a question? Ask an expert!

Our team of Infinite Banking Specialists are standing by to research and answer your questions.

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