Wednesday, October 9, 2013

QRP (Qualified Retirement Account) vs. Bank On Yourself: Which Is Better???



The QRP is basically another type of government retirement plan with greater options to choose the type of investments you want to make and allows for contributions up to $51000 a year.  I think it’s great for individuals who already have money locked up in IRA’s and old 401k’s and would like to be able to invest in assets away from the traditional Wall Street recommended mutual fund/stock market roller coaster.

That said, a QRP is still government retirement account with rules and restrictions regarding how much can be put in, borrowed out($50k max loan) and paid back (within 5 years). Like all qualified retirement plans, the benefit of a tax deduction and tax-deferred growth is given a lot of mention.  Using different words that mean the same thing, I would call it a “tax postponed” retirement account because that’s what tax-deferred means.  The only way to be free from govt handcuffs around this money is to pay income tax as it is earned.  We are still at historically low tax brackets.  Why take a tax deduction now if you believe tax brackets will increase while at the same time postponing your income taxes to a later date at an unspecified rate?  It’s like buying a house today and asking the realtor to let you know what it cost you in 20 years.  Same thinking applies with a QRP.  I do think it’s better than a traditional IRA and 401k but a QRP still ties the owner of the it to the government and future taxes at the highest income tax level they’ll be in when they to take distribution (or transfer the account upon death).

A Roth QRP is a better way to go because it is after tax money and proceeds will be tax free.  The downfall is the government can change the rules on these plans (same with a tax-deferred QRP) at anytime and you still have limitations on loan amounts and loan repayments. 

Revenue starved, insolvent governments (like the U.S. Government) can and do make changes to these plans as they see fit.  My guess is that they will put a cap on the amount that can grow tax-free in these accounts.  It’s already being talked about (see this article: http://www.heritage.org/research/reports/2013/05/obama-s-cap-on-defined-contribution-retirement-savings-plans ).

In summary, a private non-qualified vehicle like Bank On Yourself is the best way to go.  Bank On Yourself is not subject to annual contribution limits, or limited borrowing capacity & restrictive loan repayment schedules, access is granted anytime for any reason on a tax-favored basis with a policy loan, Bank On Yourself allows uninterrupted growth even when cash values are used elsewhere, and ultimately it will transfer an income tax-free death benefit to the beneficiaries over and above the existing cash values.  No other assets does this and accelerates in value upon death.  It’s the most versatile financial tool available to use for any type of investing including real estate.

A side note about real estate.  The IRS tax code already allows real estate equity to be exchanged tax free via 1031 exchanges.  Rental income is taxable but it’s minimized with depreciation and deductions related to maintaining the property.  Any distribution that comes from a QRP will be taxed as ordinary income which is the highest tax a person will pay so taxes will be paid one way or another.  It’s only irrelevant if you think taxes will be lower in the future.  If so, postpone for as long as possible… just don’t hold breath waiting for tax brackets to get any lower.   

I’d prefer to play it safe.  Keep my money as far away from government involvement and restrictions as well as guaranteed future tax obligations via the income tax and unknown future tax code.

JLM Wealth Strategies, Inc.
(925) 386-6639 Office
Bank On Yourself™ Authorized Advisor
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