Any analysis of present or future retirement income is not complete unless the taxation of this income is included. There are three levels of taxation that need to be taken into consideration as follows:
Taxation of Contributions
Are the contributions by you or your employer tax deductible? “Qualified” plans such as 401ks, 403bs and certain IRAs are tax deductible. In other words, contributions to the plans are not taxed to you when they are paid into the plans. “Qualified” plan assets provide tax deductibility and tax deferral, but withdrawals, during lifetime or for inheritance are taxed completely as ordinary income.
Taxation of Gains in the Investments between Contributions and Withdrawals
Are gains in the investments tax deferred? Are gains in your assets taxed on a current basis as ordinary income or capital gains, or is taxation on the gains not recognized until you take withdrawals from these assets? Gains in planning opportunities such as Roth IRAs or “Roth Alternatives” are not taxed at either ordinary income or capital gains rates during the accumulation phase.
Taxation of withdrawals
When you liquidate funds for retirement, are these withdrawals taxed as ordinary income or capital gains, or are the distributions tax free? “Qualified” assets such as traditional IRAs and 401(k)s are taxed as ordinary income while Roth IRAs and “Roth Alternatives” are free of both ordinary income and capital gains.
The Quandary
When it comes to tax deductibility, tax deferral and tax-free distributions, no retirement asset class allows you to have all three. The best you can have is two out of three!
The Solution
A thorough review of your lifestyle goals and plans in retirement necessarily includes a review of not only present tax consequences, but tax consequences when distributions are taken. It’s not just how much you accumulate for retirement. it’s how much you get to keep after taxes in retirement.
Below is a taxation summary for The Roth Alternative.
| Green is a Positive Aspect | Qualified Plans 401k/IRA |
Equities | Tax-Free Bonds | Annuities | Roth Alternative |
| Contributions | Tax Deductable | After Taxes | After Taxes | After Taxes | After Taxes |
| Contribution Limits | Yes | No | No | No | No |
| Accumulation Phase | Tax Deferred | Taxable | Taxable | Tax Deferred | Tax Deferred |
| Repositioning Assets | Tax Free | Capital Gains | Taxable | Tax Free | Tax Free |
| Distribution Phase | Capital Gains or Ordinary Income | Taxed as Dividends | Tax Free | Ordinary Income on Gains | Tax Free |
| Access | Past Age 59 1/2 | Any Time | Any Time | Past Age 59 1/2 | Any Time |
| Estate Taxes at Death | 75% – 85% | Up to 50% | Up to 50% | 60% | Tax Free* |
| Asset Protection | 100% | 0 | 0 | 100%** | 100%** |
* Subject to advanced planning.
** This Asset Protection feature varies from state to state.