Setting A IRS RETIREMENT PLAN IN SAN MARCOS TEXAS

Most people think the more money, the better and of course, this is very true. If currently, the United States needs 2 million US dollars for retirement, 10 years later, it will require 2.7 million, and 20 years later, 3.6 million. To accumulate such a huge retirement fund, we can only start the retirement plan as early as possible, exchange time for space, and achieve the goal through long-term accumulation. Loving to save money for the future is a great virtue for most people. Most people put maximum limits on 401K, 403B or personal retirement accounts for tax saving and pension purposes. As far as retirement plans are concerned, too much money may not be considered a good thing, and it may not be a cost-effective thing. Many taxes have been saved today, and higher taxes may have to be paid in the future. In addition to income tax, inheritance tax is also payable. This is one of them. Secondly, for the average working-class, more money is put into retirement plans, which means you can spend less money before retirement. The period when the real big spenders spend money is before retirement: buying a big house, buying a car, funding for the children’s education, and so on.

The same reason people invest in their retirement accounts in the past is the same reason for paying less taxes today. While some taxes are being saved today, in the long run, higher taxes will have to be paid in retirement. If a husband and  his wife are both 36 years old and the tax rate is 31%and their personal 401K accounts already have $50,000 each, and each person also puts $10,000 into the 401K each year, assuming an annual return of 10%, 30 years later, they would have accumulated about 4.5 million  dollars in their 401K accounts. When they are retiring, they can decide to adopt a conservative investment strategy. The annual interest income is 5%, that is, 220,000 per year. The income tax to be paid by then is higher than today’s tax rate. What’s more is that these 4.5 million still exist. After death, first of all, you have to pay 40% income tax, that is, 1.8 million is removed, and 2.7 million is left. According to the current inheritance tax allowance, no tax is required, but if a few years ago, the children would have one million inheritance allowance, the remaining 1.7 million would have to pay 55% of the inheritance tax, which is $935,000, which means These 4.5 million inheritances have to pay 2.735 million  dollars in taxes. Only 1.765 million are passed on to their children.

Generally speaking, there are 2 types of retirement plans, they are: 

Qualified Retirement Plan – This plan is tax deductible. The Qualified Plan mainly includes 401K/403B, traditional IRA and SEP IRA. IRA stands for Individual Retirement Account.  There are also other qualified plans.

Non-qualified Retirement Plan – This plan is not tax deductible. The Non-qualified plan includes Roth IRA, annuity and life insurance that can be used as a retirement fund. Other examples include executive bonus plan and deferred compensation.

QUALIFIED RETIREMENT PLAN

A qualified retirement plan is a retirement plan recognized by the IRS where investment income accumulates tax-deferred. Common examples include individual retirement accounts (IRAs), pension plans and Keogh plans. Most retirement plans offered through your job are qualified retirement plans. There are upper limits of investment, you cannot put more money without restrictions, and cannot engage indiscrimination. Qualified people all put money at the same percentage.

 

NON QUALIFIED RETIREMENT PLAN

A Non-qualified retirement plan is a retirement savings plan. They are called non-qualified because they do not adhere to Employee Retirement Income Security Act (ERISA) guidelines as with a qualified plan which does. Non-qualified plans are generally used to supply high-paid executives with an additional retirement savings option. Non-qualified plans are not tax deductible, but many non-qualified plans have no upper limit for depositing money. You can deposit as much as you want such as annuity or life insurance.

Both Qualified Plan and Non-qualified Plan have certain tax benefits. Some can be tax deferred, some can be tax deductible, and some do not need to pay tax (such as Roth IRA). Of course, you can also invest in mutual funds, stocks or real estate as a retirement fund, but those practices may not enjoy tax benefits. For some Qualified Plans as Defined Benefit Plan, you can enjoy up to 10 million and 20 million for tax credits, this plan sounds tempting, but for most people is inappropriate. The following shows a detailed explanation of mostly used retirement plans.

        

401K

Most large and medium-sized companies provide 401K plans for employees. The 401K plan is a plan for employees to make contributions. Employees volunteer to invest up to 15% of their annual income and up to $19,500 (in 2020) into 401K. The money invested in the 401K plan is tax deductible, and the portion invested in the 401K can be deducted at the end of the year. Many employers will give you some matches. Usually the 6% part of your annual income gives you 50% of the match, which is to give you 3% of free money.

If your annual salary is 100,000 and you put $15,000 in 401K, your employer may give you a $3,000 match. Some industries such as hospitals and educational institutions have a high match, some have a low match, and some companies have no match at all. For working-class people who receive W-2, 401K is the most common type of retirement plan.

An advantage of this type of retirement plan is that you can postpone the tax as long as you don’t take it out. The retirement plan 403B provided by hospitals and schools has a different name, but it is similar to 401K.

 

 

TRADITIONAL IRA

Some companies do not provide any retirement plans, and some IT practitioners act as consultants, but they have W-2 forms and employers do not have retirement plans. These people can open a traditional IRA account first. You can invest $6,000 per year, and if you are over 50, you can invest $7,000. The money invested in the traditional IRA is the same as 401K, which can be deducted or extended. Both spouses work and one does not work, and the working party can also open a traditional IRA for a spouse who is not working. If the AGI (adjusted gross incomes) of the husband and wife is less than $98,000, the $6,000 is also tax deductible. Don’t pay attention to the $6,000 you put in each year. If you put $6,000 a year and it lasts for 30 years, there will be about $800,000 assuming an 8% return. The return rate may vary.

 

 

SEP PLAN

This is the Simplified Employee Pension plan, mainly for self-employed persons, such as the owner of a small company, or the person who receives the 1099 form, some people receive both the W2 form and the 1099 form, then the 1099 form Income can also be used to open SEP. You can use 25% of your annual net income to set up a SEP, which can’t exceed $57,000 (2020). For example, if you are a medical practitioner or Independent consultant, your annual income is $200,000, and the relevant Expenses, Social Security Tax Medicare Tax, etc. are removed. Your net income is $150,000. You can take out $30,000 (150,000 x 20%) to open a SEP. If you file a tax return, you will report it at $120,000 (150,000-30,000). The $30,000 invested in the SEP does not need to be taxed. If you can put $30,000 in the SEP every year, you can accumulate about $3.39 million after 30 years assuming a 8 % Annual return. You can consider retiring early and enjoying retirement.

 

ROTH IRA

Roth IRA is a retirement plan that has been launched for more than a decade. It stipulates that individual taxpayers with an annual gross income (AGI) of less than $137,000 and joint taxpayers with an annual gross income (AGI) of less than $203,000 can open a Roth IRA retirement account, which can invest $6,000 per year, and if they exceed 50, they can invest $7000. Like Roth 401K, the money invested in Roth IRA is not tax deductible, but the income generated in the investment process is not subject to tax when it is taken out after retirement. If you already have other qualified retirement plans and you wish to open a Roth IRA, you should consider the overall financial planning of the family, the balance of the retirement plan and the children’s education fund, and also the current cash flow.

 

ANNUITY

Annuity is also a retirement plan, but most people don’t know much about it as it is not commonly used. Annuities are not tax deductible, but they can be tax deferred and there is no upper limit to how much money is placed. The money put into the annuity will not be taxed as long as it is not taken out for 20 to 30 years. People shouldn’t underestimate tax deferral. It is very powerful in the long run. As a simple example, if you invest $10,000, you will generate a profit of $1,000. If you are in a common mutual fund, this $1,000 is subject to tax. Assuming a 20% tax, you still have $800 to reinvest. This $1,000 does not have to pay taxes in the year, and this $1,000 can be reinvested. Of course, the income generated by reinvesting $ 1,000 is of course more than $800.

There are two main types of annuities. They are:

Fixed Annuity – Insurance companies guarantee that you will receive at least 3% interest per year. It may also reach 5%, 6%, or even 7%, but doesn’t get up to 10%. 

Variable Annuity –This is invested in mutual funds. Now a new type of index annuity can achieve exponential growth without losing money, and lock the highest value when withdrawing money. 

People who should make use of the annuity plan are those who want to retire early or those who have a large amount of money that has no current use and those whose retirement plans started a bit late.

 

LIFE INSURANCE

Life insurance is not strictly a retirement plan, but all kinds of permanent insurance have a cash value. Over time, within 10 or 20 years, you can accumulate a considerable cash value. After retirement, you can use withdrawal or loan to take out part or most of the cash value as a supplement to the retirement fund. When the life insurance is valid, there is no tax to take out the cash value, and if it is Loan, there may be some interest. If you passed away, and the insurance company paid your family a sum of money, you would be able to use the cash value.

In summary, the various retirement plans mentioned above have their own advantages and disadvantages. Qualified plans can be tax deductible, but there is a limit on how much money can be placed. As long as it is a retirement plan, you must wait until you are 59 and half years old (with a few exceptions). Life insurance is not a retirement plan and there are no restrictions on having to wait until you are 59 and half years old to get the money.